During the Autumn Budget 2025 announcements were made relating to changes in capital allowances. We want to demystify what this means and the impact it will have on businesses, as well as clear up some common misconceptions as to their applications.
So firstly, what is a capital allowance?
A capital allowance is a form of a tax relief that a business can claim on certain capital expenditure. This allows them to deduct a certain percentage of the cost of the asset from their taxable profits over time. Depending on the purchase, depends on the amount of tax relief available.
There are different types of capital allowances falling into two categories, standard and first year allowances.
Standard
Standard writing-down allowances (WDAs) are a form of capital allowance that let a business deduct a proportion of the cost of qualifying capital assets from taxable profits each year. These allowances apply when the full cost isn’t claimed upfront using first-year reliefs.
This is available for all types of businesses including sole trader and partnerships. Up until 2026 this was set at a rate of 18% for main rate assets and 6% for special rate items. Following the Autumn Budget, the standard allowance for main rate assets has been reduced to 14%, the special rate pool continues to be 6%. This means that for a main rate asset you would deduct 14% of the remaining pool value from your taxable profit each year on a reducing balance basis.
In reality, standard capital allowances are rarely used, as most businesses will use first year allowances instead.
First Year Allowances
There are several first-year allowances available, all with slightly different criteria, but what they all have in common is they allow a business deducted a higher percentage, often up to 100%, of the cost of qualifying assets from taxable profits in the year the asset is purchased, instead of spreading the relief over several years.
The first main year allowances available are summarised below:
| Type of FYA | Eligibility | Deduction Available | Criteria |
| Annual Investment Allowance (main rate) Annual Investment Allowance (special rate) | For all businesses | 100% 50% | For both new and used equipment but capital expenditure for the year must not have exceeded £1m |
| Full Expensing | Not for unincorporated businesses | 100% | For new assets only |
| 40% Capital Allowance | For all businesses | 40% | For new assets only Can be used by businesses purchasing assets to lease*, which have previously been excluded from FYA |
*This characteristic of the new capital allowance introduced in the Autumn Budget 2025, has been misleading. We want to clarify that this cannot be used in conjunction with a lease agreement, but instead is geared towards lease providers such as vehicle leasing companies, who buy assets to lease.
Whilst lease agreements don’t qualify for first year allowances, hire purchase agreements and paying cash do. By utilising a hire purchase agreement, you are not only utilising the accelerated tax relief but also protecting your cashflow, so it can work harder for you.
Finding the right finance agreement for you to help maximise the tax relief can be a bit of a minefield, but it doesn’t have to be. As a 32 year established broker from an accounting background, we will talk through all options with you and are more than happy to discuss with your accountant to ensure the right solution for you.