What is the 40% First Year Allowance?
The 40% First Year Allowance is a capital allowance that enables businesses to deduct 40% of the cost of qualifying plant and machinery expenditure from their taxable profits in the year the asset is purchased. Unlike the standard writing down allowances (WDAs), which spread tax relief over several years, this FYA provides substantial upfront tax relief.
This allowance applies to main-rate assets which are not within full expensing, filling an important gap in the current capital allowance regime. The remaining 60% of the expenditure after claiming the FYA will continue to qualify for the standard WDAs in subsequent years, though it’s worth noting that the main-rate WDAs will be reduced from 18% to 14% from April 2026.
This is a new relief introduced in the 2025 Autumn Budget, separate from the existing full expensing regime that provides 100% relief for main-rate plant and machinery expenditure. The 40% FYA is designed to complement full expensing by covering scenarios where the latter doesn’t apply.
Who Can Benefit from the 40% First Year Allowance?
One of the most significant aspects of this new allowance is its broad applicability. Unlike full expensing, which is primarily available to companies, the 40% FYA extends to a much wider range of businesses.
Sole traders, partnerships, and limited liability partnerships can all claim this allowance. For many smaller businesses operating as sole traders or in partnership, this represents the first time they’ve had access to such generous upfront tax relief on capital expenditure.
What Expenditure Qualifies?
Understanding which expenditure qualifies for the 40% first year allowances is essential for tax planning.
Main Pool Expenditure
The allowance applies to expenditure on plant and machinery that would normally be allocated to the main pool for capital allowances purposes. The main pool includes most business equipment, machinery, and qualifying fixtures.
Common examples include:
- Manufacturing machinery and equipment
- Office equipment such as computers, printers, and telecommunications systems
- Furniture and furnishings in business premises
- Shop fittings and display equipment
- Kitchen equipment for restaurants and cafés
- Tools and equipment for trades
- Air conditioning and heating systems
Timing Requirements
The new allowance applies to expenditure incurred on or after 1 January 2026. This means that businesses making significant capital investments should carefully consider the timing of their purchases to maximise tax relief.
For corporation tax purposes, the allowance takes effect from 1 January 2026, whilst for income tax (relevant to sole traders and partnerships), it applies from 6 April 2026. This slight difference in timing is important for tax planning, particularly for businesses with year-ends falling between these dates.
Get expert advice to identify qualifying assets and make sure your business claims the maximum 40% First Year Allowance relief.
How Does the 40% FYA Compare to Other Capital Allowances?
Understanding how the 40% FYA fits within the broader capital allowances landscape helps businesses make informed investment decisions.
Full Expensing
Full expensing, introduced in April 2023 and made permanent as part of the corporate tax roadmap, provides 100% first-year relief for qualifying main-rate plant and machinery. However, it’s only available to companies (not unincorporated businesses) and excludes certain assets, particularly those for leasing.
When to use full expensing: Companies should always claim full expensing where available, as 100% immediate relief is more valuable than 40% upfront relief.
When to use the 40% FYA: Use this allowance when full expensing isn’t available; if you’re an unincorporated business, purchasing assets for leasing, or acquiring other excluded assets.
Annual Investment Allowance (AIA)
There were no changes to the annual investment allowance, which provides 100% relief for certain qualifying plant and machinery additions up to £1 million. The AIA remains available and continues to be valuable.
AIA vs 40% FYA: Businesses should prioritise using their AIA first, as it provides 100% relief. Once the £1 million AIA is exhausted, the 40% FYA becomes relevant for additional expenditure on qualifying assets.
Why the AIA still matters: The qualifying conditions for the AIA are less strict than the full expensing conditions and apply to unincorporated businesses; therefore, the AIA still has value.
Writing Down Allowances
For expenditure that doesn’t qualify for full expensing, the AIA, or the 40% FYA, businesses can claim writing down allowances on the reducing balance of expenditure. From 1 April 2026 for corporation tax and 6 April 2026 for income tax, the main rate writing down allowances will be reduced from 18% to 14%.
This reduction makes the 40% FYA even more valuable, as it allows businesses to claim a higher proportion of relief upfront before the lower writing-down allowance rate applies to the remaining balance.
How the 40% FYA Works
Let’s say a sole Trader cafe owner invests £60,000 in new kitchen equipment in May 2026 (after 6 April 2026). He’s already used his £1 million AIA limit.
As a sole trader, they cannot claim full expensing. However, he can claim the 40% FYA:
Tax relief available:
- 2026/27 tax year: 40% FYA = £60,000 × 40% = £24,000
- Remaining balance: £36,000
- Subsequent years: Writing down allowance at 14% on reducing balance
If they are a higher-rate taxpayer (40%), the immediate tax saving is £9,600 (£24,000 × 40%), providing valuable support for their business investment.
Strategic Tax Planning Considerations
The introduction of the 40% FYA creates several important tax planning opportunities and considerations.
Timing of Capital Expenditure
With the allowance applying from 1 January, timing is crucial:
For companies with December or January year-ends: Consider whether to accelerate purchases into January 2026 onwards to claim the 40% FYA, rather than purchasing in late 2025 and claiming only writing down allowances.
For businesses with March year-ends: Purchases after 1 January 2026 will qualify for the enhanced relief.
Managing the AIA: Remember that the £1 million AIA should be used first, as it provides 100% relief. Plan your capital expenditure to maximise use of the AIA before claiming the 40% FYA.
Professional Advice
While this guide provides an overview of the 40% First Year Allowance, capital allowances can be complex, and professional tax advice is often essential. A qualified tax adviser can help identify which assets qualify, ensure you claim the maximum relief, and advise on the optimal timing of purchases to enhance cash flow. They can also manage the administrative side, making sure claims are accurately documented and disclosed in your tax returns, reducing the risk of HMRC enquiries.
Our expert team is on hand to support you.
Frequently Asked Questions
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When does the 40% First Year Allowance start?
The 40% FYA takes effect from 1 January 2026. This means the timing of your purchase matters; expenditure incurred before these dates won’t qualify for the enhanced relief.
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Can I claim both the Annual Investment Allowance and the 40% FYA?
Not on the same expenditure. You should prioritise using your Annual Investment Allowance (AIA) first, as it provides 100% relief up to £1 million per year. Once you’ve exhausted your AIA, then you can claim the 40% FYA on additional qualifying expenditure. The AIA continues to be available and unchanged by the Budget.
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I run a company. Should I claim full expensing or the 40% FYA?
Always claim full expensing when available, as it provides 100% immediate relief compared to 40%. The 40% FYA is designed for situations where full expensing doesn’t apply, such as when you’re purchasing assets for leasing, buying certain excluded assets, or if you’re an unincorporated business that can’t access full expensing at all.
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What happens to the remaining 60% after claiming the FYA?
After claiming the 40% first-year allowance, the remaining 60% of the expenditure is added to your main pool of plant and machinery. You can then claim writing down allowances on this balance at the main pool rate, which will be 14% from April 2026. These allowances continue on a reducing balance basis in subsequent years until the pool is exhausted.
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I'm a sole trader. How does this benefit me compared to the current rules?
This is excellent news for sole traders. Previously, you could only claim the Annual Investment Allowance (up to £1 million) and then standard writing down allowances at 18%. From 6 April 2026, once you’ve used your AIA, you can claim 40% upfront relief on additional qualifying expenditure instead of spreading it over many years. This significantly improves your cash flow and reduces your immediate tax bill.
Frequently Asked Questions
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What if I purchase assets in December 2025. Can I claim the 40% FYA?
No. The 40% FYA only applies to expenditure incurred on or after 1 January 2026. Assets purchased before these dates will only qualify for the Annual Investment Allowance (if available) or standard writing-down allowances. However, you should note that purchases in December 2025 will still get the 18% writing-down allowance rate before it reduces to 14%.
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Can I claim the 40% FYA on integral features of buildings?
Integral features (such as lifts, heating systems, air conditioning, electrical systems, and hot water systems) are normally allocated to the special rate pool, not the main pool. The 40% FYA applies to main pool expenditure, so integral features would not qualify. However, always check the specific classification of your expenditure, as some items might qualify as plant and machinery rather than integral features depending on the circumstances.
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Will the 40% FYA be available indefinitely?
The government hasn’t announced an end date for the 40% FYA, suggesting it’s intended as a permanent feature of the capital allowances system alongside full expensing and the Annual Investment Allowance. However, tax rules can change in future Budgets, so it’s always worth staying informed about any policy updates.
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Does the 40% FYA apply if I'm in a partnership?
Yes, absolutely. The 40% FYA is available to partnerships, which is a significant benefit. The relief is claimed by the partnership and then allocated to individual partners based on their profit-sharing ratios. This is particularly valuable for professional partnerships (solicitors, accountants, consultants) and trading partnerships making significant capital investments.