Budget 2025 – making allowances…

The Autumn Budget 2025 didn’t rip up the capital allowances rulebook, but it did reshape how relief is timed and accessed. If you work with investment planning, asset financing or tax forecasting, these changes aren’t background noise. They alter how quickly businesses can recover the cost of plant and machinery and how attractive certain investments appear on paper.

Let’s walk through what changed and why it matters.

A new 40 percent first year allowance

From January 2026, qualifying main-rate plant and machinery will benefit from a new 40 percent first year allowance (FYA).

It sits somewhere between the now-familiar “full expensing” and the usual writing down allowances. The biggest shift is who can use it. Unlike previous reliefs, this covers leased assets. That alone will affect a sizeable portion of investment-heavy businesses, especially those that prefer asset finance rather than outright purchase.

It does not apply to:

• • Second-hand assets. Only new, unused assets qualify.
  • Cars (even if used for business). Cars bought by businesses remain excluded.
  • Assets leased to overseas customers (i.e. international leasing).

For many businesses, that 40 percent upfront claim offers a useful accelerator to cash flow. It is not quite as dramatic as full expensing, but far more generous than a tapered allowance.

If you run forecasts or prepare capital investment cases, that timing shift needs attention. A factory replacing machinery every five to seven years will see a different tax pattern compared with a portfolio business acquiring assets for short leasing cycles.

Notes:

     ➤ ➤ FYA is not replacing the Annual Investment Allowance (AIA) and they can be used concurrently so long as you are not trying to claim both. AIA remains a fixed feature of capital allowances.

     ➤ ➤ Special FYAs existed previously (e.g. “full expensing” giving 100% deduction for certain plant & machinery, or 50% for special-rate assets) – however these didn’t always apply (for example to leased assets, unincorporated businesses, or second-hand assets).

     ➤ ➤ If an asset already qualifies under the existing “full expensing” or AIA rules (or other existing FYAs), then normal rules for those continue to apply.

A slower writing down allowance

Alongside this benefit comes a cost. The main writing down allowance drops from 18 percent to 14 percent from April 2026.

That might not grab attention at first glance, but over time it slows relief significantly for anything not covered by the new FYA or full expensing. Second-hand assets and long-life assets are likely to feel this most.

A simple example:

• Spend £100,000 on qualifying equipment
• Claim 40 percent in year one (so £40,000)
• The remaining £60,000 goes into the pool at 14 percent per year

Compare that with the current 18 percent rate and you quickly see how recovery tails off more slowly.

This changes how “efficient” certain asset types look in planning models. It also adds a new wrinkle when deciding whether to buy new, buy reused or lease.

The bigger picture: timing not just generosity

What the government has effectively done is front-load tax relief while narrowing long-term generosity.

It is a political balancing act.

Businesses see encouragement to invest sooner. The Treasury sees the long tail of tax relief shrink.

That means timing becomes more strategic. Buying at the wrong point in the tax year, using the wrong financing structure or allocating assets to the wrong pool could cost real money over the coming years.

What finance leaders should be thinking about

If you are advising or making investment decisions, a few practical questions now become relevant:

   ✔   Will the business benefit more from the 40 percent relief or does full expensing apply?

   ✔   Are leased assets now more attractive than owned assets for tax timing?

   ✔   Do existing investment plans need rescheduling so spending falls after the change?

   ✔   Does asset categorisation need tightening so nothing accidentally falls into the slower allowance?

It may also be worth revisiting group policies on second-hand purchases. A bargain asset is less of a bargain if claiming relief takes twice as long.

Final thoughts

The Autumn Budget did not introduce a new regime, but it has changed the rhythm of capital allowances. Relief is now more generous up front and slower over time.

For some businesses this will be genuinely helpful. For others, especially those holding assets long-term or investing irregularly, it may be neutral or even negative.

Either way, it is not something to skim and file. These adjustments affect business cases, tax cash flow and how assets are financed. If this is an area you manage or advise on, the sooner investment planning reflects the new structure, the better.

If you have any questions about Capital Allowances or Innovation Tax Relief please contact the ABGi Team. A member of our team will get back to you to discuss your unique needs and explain how we can assist.