A permanent 40% first‑year allowance (FYA) on main‑rate plant and machinery takes effect today, 1 January 2026. Announced at Budget 2025, the measure sits alongside full expensing and the £1 million Annual Investment Allowance (AIA), giving businesses more upfront relief on qualifying investment. HM Treasury says this is part of a broader push to support business investment while keeping Corporation Tax capped at 25% for this Parliament.

The new 40% FYA is notable for who can use it. It applies to unincorporated businesses as well as companies and-crucially-covers assets bought for leasing, an area excluded from full expensing. Cars and second‑hand assets are out, and there is a specific exclusion for overseas leasing. Relief is for new, main‑rate assets only, with special‑rate items still following existing rules.

Two offsets to remember land in the spring. First, the main‑rate writing‑down allowance (WDA) falls from 18% to 14% for accounting periods beginning on or after 1 April 2026 for Corporation Tax and 6 April 2026 for Income Tax. Second, the AIA remains at £1 million and full expensing stays in place for companies investing in new main‑rate assets. Special‑rate WDAs remain at 6%. HM Treasury’s published rates confirm the picture.

What this means in practice depends on your profile. If you are a company using the kit yourself, full expensing will usually beat the new 40% FYA because it’s a 100% year‑one deduction. If you are an equipment‑hire firm-or an unincorporated business-today’s change opens up meaningful year‑one relief that wasn’t previously accessible under full expensing. HMRC guidance makes clear that leased assets generally don’t qualify for full expensing, whereas AIA and now the 40% FYA can.

Case study: equipment hire. A plant‑hire company buys £1.5 million of new kit on 1 January 2026 for leasing to customers in the UK. In year one it can claim £1 million via the AIA and 40% FYA on the remaining £500,000, giving a total deduction of £1.2 million. At a 25% Corporation Tax rate, that’s up to £300,000 off the tax bill in year one. The residual £300,000 (the 60% left of the £500,000) enters the main pool for WDAs at the applicable rate from April. HMRC confirms you can mix AIA and a first‑year allowance on the same asset cost.

Case study: sole trader overshooting the AIA. A fabrication business (unincorporated) spends £1.2 million on new machinery this spring. With AIA capped at £1 million, the remaining £200,000 can now attract the 40% FYA, giving an extra £80,000 deduction in year one, with the balance joining the pool for WDAs after April. The cash effect depends on the owner’s marginal Income Tax rate, but the timing benefit is clear. HMRC’s policy note sets out the scope for unincorporated businesses.

Mind the WDA step‑down. A company with a £2 million main pool at 31 March 2026 would, all else equal, have seen a £360,000 WDA at 18%. From April, that annual relief falls to £280,000 at 14%-£80,000 less. At a 25% tax rate that is £20,000 extra tax payable for 2026/27, improving thereafter as the pool unwinds more slowly. This is how the Chancellor funds part of today’s upfront relief. The rate changes and effective dates are set out by HM Treasury and HMRC.

Watch your year‑ends. For chargeable periods that straddle 1 April 2026 (Corporation Tax) or 6 April 2026 (Income Tax), hybrid WDA rates apply based on time apportionment across the period. So a company with a 12‑month year to 30 September 2026 will use a blended main‑rate WDA of roughly 16%: half at 18%, half at 14%. HMRC’s note explains the mechanics.

Asset definitions still matter. Cars remain excluded from AIA and from the new 40% FYA, while commercial vehicles such as vans typically fall outside the “car” definition-classification drives eligibility, so check the specifics before you spend. HMRC’s manuals set out the tests used in practice.

Practical points for finance teams. Reliefs apply in the period you incur the expenditure, which may be the contract date or payment date depending on terms; hire purchase has its own timing rules. Keep clear evidence of purchase, installation and business use, and model disposal impacts because balancing charges can claw back relief later. HMRC’s error‑avoidance guidance is a good checklist.

Bottom line for 2026 planning: companies investing in their own main‑rate kit will usually stick with full expensing; lessors and larger unincorporated businesses gain a new 40% option; everyone with sizeable historic main‑rate pools should re‑baseline cashflow as WDAs fall from April. That is the trade‑off set out in the government’s Budget 2025 documentation.