Capital allowance tax breaks are changing – here’s what small business owners need to know

Capital allowances are a type of tax break available to businesses when purchasing new assets. They allow you to deduct some or all of the value of an item from your profits before you pay tax.

Used effectively, they can represent a significant saving for small business owners looking to invest in machinery, equipment or business vehicles to grow. But understanding what capital allowances mean for your business can be tricky. 

Here we explain what capital allowance changes come into place in 2026, and how they might affect your small business.

What’s changing with capital allowances?

In the latest Budget, announced on 26th November 2025, the government made several changes to capital allowances tax breaks: 

• Introduced a new 40% first year allowance 

• Reduced writing down allowances

• Extended 100% first year allowances for electric vehicles 

While these changes will particularly affect unincorporated businesses and leasing providers, as well as companies with pools of historic main rate expenditure, every small business owner should know the tax breaks available to help with expenditure planning.

For information on all capital allowances, read our guide to tax breaks available when purchasing a new asset.

If you’re unsure what capital allowance you qualify for, please speak to an accountant or tax advisor. Funding Circle does not provide financial, legal or tax advice.

Understanding the difference between first year allowances and writing down allowances 

There are two main types of capital allowances available in the UK: first year allowances (FYA) and writing down allowances (WDA). 

Each can be used in different ways and both have different impacts on the tax you pay. 

• First year allowances – allow you to claim tax relief in the year the asset was purchased

• Writing down allowances – spreads the tax relief over several years at a percentage of the asset’s declining value 

There are various different types of FYA, including the annual investment allowance, 100% FYA (full expensing), 50% special rate FYA and, as of January 2026, the new 40% FYA. 

If your plant and machinery spend doesn’t qualify for the annual investment allowance, or you’ve already claimed the maximum amount, you can claim WDA.

Introduction of a new 40% first year allowance 

The new 40% FYA for main rate expenditure (broadly, plant and machinery) is now available. With reduced restrictions compared to other FYAs, it’s designed to encourage investment where other FYAs are not available, such as for assets bought for leasing and by unincorporated businesses.

For the first time, this will give sole traders and partnerships and leasing providers additional support at the point of investment. More businesses will now benefit from a reduced tax bill in the year they invest, which will help with cash flow and give confidence when planning for future investment.

It’s important to note that cars, second-hand assets and some overseas leased assets are not eligible for the new 40% FYA.

Reduction of writing down allowances

This year, the WDA on the main pool of plant and machinery will reduce from 18% to 14%. This will come into effect on:

• 1st April 2026 for companies subject to Corporation Tax

• 6th April 2026 for those subject to income tax (sole traders and partnerships)

This will affect how businesses recover the cost of their capital investments and could lead to higher tax bills. Those businesses with large pools of historic main rate expenditure will be most affected by the WDA reduction.  

100% first year allowances for electric vehicles extended

Small business owners will continue to benefit from tax relief on electric vehicles with the 100% FYA for zero-emission vehicles and chargepoints extended for a further year, until:

• 31st March 2027 for Corporation Tax purposes

• 5th April 2027 for income tax purposes

For businesses who want to improve their environmental credentials, this FYA extension gives some certainty when it comes to future planning (until 2027 at least). It offers a strong financial incentive to invest in electric vehicles by lowering tax bills in the first year, eliminating the need for more complicated writing down allowances in future years, and improving short-term cash flow.

The businesses that will benefit most from this extension are those looking to invest heavily (eg. modernise their fleet or install chargepoints for staff or customers) or who regularly purchase vehicles or EV equipment that costs more than they could deduct using the annual investment allowance (currently £1 million).

What these capital allowance changes mean for small business owners

While the new 40% FYA could reduce tax bills for some businesses, the reduction in WDA could offset those savings. Any businesses thinking of investing this year will need to plan their expenditure carefully to maximise the tax breaks available and ensure they understand the tax implications.  

As a small business owner, whether a company or unincorporated, understanding what capital allowance tax breaks you’re entitled to is essential. 

If you’re thinking of investing in new equipment, machinery or vehicles this year, asset finance could save you up to 50%. Almost all our customers got a cheaper deal with asset finance compared to a term loan last year.

Apply online in minutes to see how much you could save with an asset finance deal. 

Please note, tax relief depends on your business type and the asset you want to finance. More information can be found at gov.uk/capital-allowances. If you are unsure please speak to an accountant or tax advisor. Funding Circle does not provide financial, legal or tax advice.

02/01/26: While we want to help as much as we can, the information found here is provided solely for informational purposes and should not be considered financial or legal advice. To the extent permitted by law, Funding Circle does not accept any liability for any loss or damage which may arise directly or indirectly from the use of, or reliance on, the information contained here. If you have any questions, please speak to your professional adviser or seek independent legal advice.