Businesses across the UK will benefit from a new tax break from today, as a 40 per cent first-year allowance for investment in plant and machinery comes into effect,
the government has announced.
The measure, which applies from Thursday 1 January 2026, is designed to encourage firms to invest by allowing them to deduct a significant portion of the cost of new equipment from their taxable profits in the year of purchase. Ministers say the change strengthens the UK’s position as one of the most competitive countries in the world for capital allowances.
The relief was first announced by the Chancellor, Rachel Reeves, at Budget 2025 and represents a permanent extension of upfront tax reliefs for business investment. It applies to main-rate plant and machinery and is available to businesses that do not benefit from full expensing, including unincorporated businesses and assets purchased for leasing.
Under the new allowance, companies can deduct 40 per cent of qualifying investment costs in the first year, reducing their tax bill and improving cash flow. The policy follows calls from business groups to widen the scope of full expensing, which currently allows companies to write off 100 per cent of qualifying investments in year one.
Chancellor of the Exchequer, Rachel Reeves, said: “Saving tax for businesses that are investing is key to building the confidence needed to boost growth. We are building on the UK’s capital allowance regime – one of the most generous in the world – alongside capping Corporation Tax and enabling more scale ups to attract investment to help create a tax system that supports growth”.
Full expensing remains in place for incorporated companies, allowing them to claim 100 per cent capital allowances on qualifying investments such as warehouses and construction equipment. For every pound invested, this can reduce a company’s tax bill by up to 25 pence.
The government said the UK already ranks at the top of OECD countries for plant and machinery capital allowances and that the latest change reinforces commitments made in the 2024 Corporate Tax Roadmap. These include keeping corporation tax capped at 25 per cent for the remainder of this Parliament, the lowest rate among G7 economies.
To balance the cost of the new relief, the Chancellor also confirmed at the Budget that the main rate writing-down allowance will be reduced from 18 per cent to 14 per cent from April 2026, a move intended to ensure the policy is introduced in a fiscally responsible way.