A new 40 per cent first-year tax allowance has taken effect, giving UK businesses faster relief on investment costs and strengthening Britain’s appeal as a place to invest.
Businesses across the UK will see an immediate boost to investment as a new tax relief allowing companies to deduct a large share of capital spending upfront comes into force, the Treasury has announced.
From 1 January 2026, firms investing in new plant and machinery will be able to claim a permanent 40 per cent first-year allowance, reducing their tax bills in the year the investment is made. Ministers say the move strengthens Britain’s position as one of the most competitive destinations in the world for business investment.
The measure, first announced by the Chancellor at Budget 2025, is designed to improve cash flow and confidence for companies by allowing faster tax relief on capital spending. It responds to long-standing calls from business groups to extend the benefits of full expensing to a wider range of assets and business models.
Under the new allowance, businesses can deduct a significant proportion of the cost of qualifying main-rate plant and machinery in the first year, rather than spreading relief over a longer period. Treasury officials argue this will make investment decisions easier at a time when firms are weighing expansion plans against rising costs and global uncertainty.
Chancellor Rachel Reeves said encouraging investment was central to the government’s growth strategy. “Saving tax for businesses that are investing is key to building the confidence needed to boost growth,” she said. “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.”
Crucially, the new relief will apply to assets bought for leasing and to unincorporated businesses, which do not currently benefit from full expensing. Ministers say this ensures the incentive supports a broader range of firms, while preserving existing incentives already available to larger companies.
Full expensing, introduced previously, allows companies to claim 100 per cent capital allowances on qualifying investments such as warehouses, manufacturing equipment and construction machinery. This means businesses can deduct the full cost of investment from taxable profits in year one, cutting their tax bill by up to 25 pence for every pound invested.
The Treasury says the combination of full expensing and the new 40 per cent first-year allowance places the UK at the top of international rankings for plant and machinery capital allowances among OECD countries. Officials argue this gives Britain a competitive edge when firms are deciding where to locate or expand operations.
The relief also sits alongside wider commitments set out in the government’s Corporate Tax Roadmap, aimed at providing long-term certainty for investors. Corporation Tax has been capped at 25 per cent for the rest of this Parliament, a rate ministers say remains the lowest in the G7.
However, the Treasury has also taken steps to balance the cost of the new incentive. At Budget 2025, the Chancellor announced that the main rate writing-down allowance will fall from 18 per cent to 14 per cent from April this year, a move designed to introduce the new relief in a fiscally responsible way.
