The 40% First-Year Allowance Explained: A 2026 Capital Investment Guide for UK SMEs

First-Year Allowance at 40%: A 2026 Capital Investment Guide for UK SMEs

SME owner reviewing new production machinery with a business adviser

Buying equipment can help a growing limited company work faster, serve more customers and improve margins. It can also create valuable tax relief.

From 1 January 2026, a new 40% first-year allowance is available for certain qualifying main-rate plant and machinery. It is designed to give businesses faster tax relief where other options, such as full expensing or the Annual Investment Allowance, are not available or are not used.

However, tax relief should support a sound investment decision: not be the reason for buying an asset that your business does not need.

This guide explains how the allowance works, which investments may qualify, how it compares with other capital allowances and what growing SMEs should consider before committing funds.

Important: Eligibility depends on the asset, business structure, expenditure date, use of the asset and the company’s tax position. The rules can be technical, so specialist advice may be needed before a major purchase.

What is the 40% first-year allowance?

The 40% first-year allowance lets a business deduct 40% of the qualifying cost of an asset from its taxable profits in the year the expenditure is incurred.

The remaining 60% is normally added to the main pool and relieved through writing-down allowances over future accounting periods.

For example, if a company buys qualifying machinery costing £50,000:

  • 40% first-year allowance: £20,000
  • Remaining amount: £30,000
  • The remaining amount is generally dealt with through the main pool

The allowance reduces taxable profits. It does not provide a 40% cash refund, and the actual Corporation Tax benefit depends on the company’s taxable profits and applicable tax rate.

The new allowance applies to qualifying expenditure incurred from 1 January 2026.

How does it compare with full expensing and the AIA?

The main capital allowance choices can be summarised as follows.

Full expensing

Full expensing allows eligible companies to claim a 100% deduction for qualifying new and unused main-rate plant and machinery in the year of purchase.

For a limited company buying equipment for its own trade, full expensing may therefore be more generous than the 40% first-year allowance: provided the company and asset meet all the relevant conditions.

Full expensing generally does not cover:

  • Cars
  • Second-hand assets
  • Certain assets acquired for leasing
  • Special-rate assets
  • Expenditure caught by specific exclusions or anti-avoidance rules

A company should not assume that every piece of new equipment qualifies. The legal ownership, use, asset classification and purchase arrangements all matter.

Annual Investment Allowance

The Annual Investment Allowance, or AIA, can provide 100% relief on qualifying plant and machinery up to the relevant annual limit.

For many small and medium-sized companies, AIA may be the first relief to consider because it can cover a wider range of qualifying assets than full expensing. It is particularly important where the company is buying second-hand equipment, which may not qualify for the 40% first-year allowance or full expensing.

The AIA limit, connected-company rules and accounting period must be checked carefully.

The 40% first-year allowance

The 40% allowance can be useful where:

  • The business cannot claim full expensing
  • The AIA limit has been used
  • The asset is acquired for a qualifying leasing activity
  • The company wants accelerated relief but does not qualify for another first-year allowance
  • The business is not incorporated and therefore cannot use company-only full expensing

The correct choice depends on the company’s wider tax position, not simply the percentage shown in the name of the allowance.

What types of investment may qualify?

Subject to the detailed rules, qualifying main-rate plant and machinery may include:

  • New production and manufacturing equipment
  • New computers and business IT equipment
  • New office machinery
  • New commercial vehicles, such as vans or lorries
  • Equipment used in a qualifying trade
  • Certain new assets acquired by leasing businesses for UK-taxed activities

The asset must normally be used for the business. It should be treated as plant or machinery rather than stock, land, a building or ordinary business expenditure.

A mixed purchase may contain different categories of expenditure. For example, a new manufacturing line could include:

  • Main-rate machinery
  • Special-rate electrical installations
  • Building alterations
  • Professional installation costs

These elements may not all receive the same tax treatment. A detailed invoice breakdown can make a significant difference.

New equipment, commercial vehicle keys and business technology being assessed for an SME investment decision

What is excluded?

The 40% first-year allowance has important exclusions. An asset is unlikely to qualify if it is:

A car

Cars are excluded from the new 40% allowance. Company cars are subject to separate capital allowance rules based on factors such as emissions and use.

A commercial van may be treated differently from a car, but the precise classification should be checked before purchase.

Second-hand

The asset must generally be new and unused. Used machinery bought from another business will not usually qualify for the 40% allowance, although it may qualify for another relief such as AIA.

A special-rate asset

Special-rate assets do not qualify for the 40% main-rate allowance. Examples may include:

  • Certain electrical systems
  • Heating and air-conditioning systems
  • Lifts and escalators
  • Thermal insulation
  • Long-life assets

Special-rate expenditure may instead fall into the special-rate pool, where a different writing-down rate applies.

Land, buildings or stock

The allowance is not a general deduction for every business purchase. Land, buildings, stock held for resale and non-qualifying building work are normally outside the plant and machinery rules.

Used mainly for overseas leasing

The new allowance can support certain leasing activity, but specific restrictions apply where assets are leased for overseas income outside the UK tax charge.

Part of an artificial arrangement

Anti-avoidance provisions can prevent relief where expenditure is incurred as part of arrangements designed to obtain an unintended tax advantage.

Practical SME examples

Example 1: New machinery for a trading company

A limited company buys new main-rate machinery for £80,000 on 15 February 2026.

If it qualifies for full expensing and the company meets the conditions, a 100% deduction may be available. The company should not automatically claim only the 40% allowance without comparing the alternatives.

Example 2: Second-hand equipment

A growing engineering company buys used equipment for £35,000 in June 2026.

The 40% first-year allowance is not normally available because the asset is second-hand. However, the company may need to consider whether AIA or another capital allowance applies.

Example 3: A leasing business

A company buys new main-rate machinery to lease to a UK business. Full expensing may not be available because of the leasing rules, but the 40% allowance may provide accelerated relief if all conditions are met.

The company should review the lessee, location, contract and expected use before relying on the relief.

Example 4: An asset that includes building work

A company spends £120,000 fitting out a new premises. The cost includes machinery, wiring, air-conditioning and structural alterations.

It would be risky to apply one allowance to the entire invoice. The costs should be separated and classified, as different parts may fall into different capital allowance categories.

Why cash flow matters more than the tax deduction

A tax allowance reduces taxable profit. It does not necessarily reduce the amount paid to the supplier.

Before buying an asset, model:

  • The deposit and payment dates
  • VAT and whether it is recoverable
  • Loan or lease repayments
  • Maintenance and insurance
  • Expected additional sales
  • Staffing and training costs
  • The timing of Corporation Tax relief
  • The effect on working capital
  • The possibility of selling or replacing the asset

A business could receive tax relief and still experience serious cash-flow pressure if the investment is poorly timed.

The main rate of writing-down allowance also reduces from 18% to 14% for companies from 1 April 2026. This makes it even more important to understand whether relief is available through full expensing, AIA, the 40% allowance or the main pool.

2026 planning dates for limited companies

Keep these dates in your investment plan:

  • 1 January 2026: The 40% first-year allowance becomes available for qualifying expenditure.
  • 1 April 2026: The main writing-down allowance rate for companies reduces from 18% to 14%.
  • Your accounting period end: The timing of the purchase and when expenditure is incurred can affect the claim.
  • Corporation Tax payment date: Companies usually pay Corporation Tax nine months and one day after the end of their accounting period. See the Corporation Tax payment deadline guidance for the relevant rule.
  • Before signing the contract: Confirm the treatment before placing an order, especially for high-value or bespoke equipment.

Pre-purchase checklist

Before approving a major investment, ask:

  • Is the business buying or leasing the asset?
  • Is it new and unused?
  • Is it plant or machinery?
  • Is it main-rate or special-rate expenditure?
  • Is it a car or a commercial vehicle?
  • Could full expensing apply?
  • Has the AIA limit been used?
  • Will any part of the cost be treated as building work?
  • When will the expenditure be incurred?
  • Is the asset used wholly or partly outside the trade?
  • Does the company have enough taxable profit to benefit from the relief?
  • Will the purchase leave enough cash for wages, VAT and suppliers?
  • Has the invoice been split into clear components?
  • Has the decision been reviewed by a suitably qualified adviser?

Find support before investing

The right advice depends on the company’s accounts, planned investment and tax position. A business may need help from Corporation Tax accountants, accountants for small business or a business accountant in the UK who understands capital expenditure and growing-company cash flow.

Accountant Search is a curated directory and digital matchmaking/referral platform, not an accountancy practice. You can find an accountant near me, compare accountant services and request introductions based on your business needs.

For companies wanting more focused support, see our guide to a limited company accountant. If you also need help with your personal tax position, indicative Self-Assessment prices start from £300 inc VAT, depending on complexity. Complete the SA registration form to request a suitable introduction.

Self-Assessment tick-box: If you need a personal tax return alongside your company accounts, tick the Self-Assessment option on the SA registration form and include details of dividends, property income, investments or other taxable income.

The 40% first-year allowance may be valuable, but it is only one part of the investment decision. Compare the available reliefs, model the cash flow and confirm the treatment before committing company funds.

This article is general information for UK SMEs and is not personal tax or accounting advice. Rules, rates and eligibility can change. Ask a qualified adviser to review your specific circumstances.