Budget 2026 – Capital Allowances changes to fund an increased tax take for Government

Two very simple changes to capital allowances, the tax relief provided to businesses on qualifying plant and machinery capital expenditure

The budget 2026 yesterday announced two very simple changes to capital allowances, the tax relief provided to businesses on qualifying plant and machinery capital expenditure:-

1 – an increase in the first year allowance from 40% to 50%

2 – a reduction in the writing down allowance from 14% to 12%

Initially I heard about those changes and thought they weren’t a big deal really as writing down allowances are often not needed due to the application of the Annual Investment Allowance granting £1m allowance for qualifying expenditure and 100% tax relief, the Super Deduction during Rishi Sunak’s time providing an enhanced 130% tax relief, and the application of full expensing providing 100% relief for main pool items, and various first year allowances.

However, apparently the reduction in the writing down allowance from 1 April 2027 for Corporation Tax and 6 April 2027 for Income Tax is the main tax change contributing to an increase in the overall tax take by nearly £7 billion a year by 2031/32.

The 40% first year allowance

This allowance is almost a last resort, after annual investment allowance, and full expensing, and any other first year allowances that apply, if you have assets that are bought new, unused and qualify as main pool items, not including cars, then you can claim a 40% first year allowance with the balance of costs being eligible for the writing down allowance.

In the budget this allowance has been increased to 50%, which isn’t earth shattering news unless you have a huge budget for spending on capital items as smaller businesses aren’t using this allowance anyway.

Writing down allowance

The writing down allowance is the main pool allowance that applies to any balance added to the pool to provide relief over the years on a reducing balance basis, so it drip feeds tax relief to the company.

As above, for many companies the annual investment allowance and full expensing cover most capital expenditure, so that there is often little pool balance to write down. However second hand items are only covered by the annual investment allowance or writing down allowance and also cars that do not qualify for the 100% first year allowance (electric or zero emissions) would also not qualify for the annual investment allowance, full expensing or the first year allowance noted above, so these assets only obtain the writing down allowance.

For many businesses, car expenditure is one of the biggest costs so you can see that where those vehicles are not electric that they would contribute to an increase in tax take by reducing the writing down allowance.

As the writing down allowance is done on a reducing balance basis, the benefit falls over time, for example:-

At the existing 14% rate, £10,000 expense:-

Year 1 – £1,400

Year 2 – £1,204

Year 3 – £1,035

Year 4 – £891

Year 5 – £766

So that after 5 years £4,704 of the total cost has still not been given any tax relief.

At the reduced 12% rate announced in the budget:-

Year 1 – £1,200

Year 2 – £1,056

Year 3 – £929

Year 4 – £818

Year 5 – £720

In this case, after 5 years £5,277 of the total cost has still not been given any tax relief.

Whilst that may not seem a huge difference, if the business is actually spending £10 million under writing down allowance the change equates to a further £573,000 not getting tax relief after 5 years.

Many businesses will also feel the change harder as the main rate of writing down allowance also fell from April 2026 to the 14% rate from previously 18% and most companies will not have calculated their tax to understand the impact of that change and yet there is a further reduction now to 12% from April 2027.

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