Capital allowances update

Over the decades, capital allowances for plant and machinery (P&M) has been one of the areas of tax that has undergone continual change. Following the abolition of the ‘super-deduction’ (i.e. 130% relief for qualifying expenditure) in April 2023, we seem to have entered an era of relative stability.

Since the 1 April 2023, ‘full expensing’ (i.e. a first-year allowance (FYA) of 100%) has been available to companies that invest in new, unused P&M that would go in the general pool. This pool includes most categories of P&M. There is a 50% FYA for special rate pool expenditure (such as P&M integral to a building). There is no monetary cap on the qualifying amounts, but some purchases are excluded, notably assets acquired for leasing.

For much longer, most businesses (companies) have had an annual investment allowance (AIA) of £1 million, also giving 100% relief. Note that cars (with a few exceptions, such as dual control driving school vehicles) are not eligible for the allowances mentioned above.

Before taking office, Rachel Reeves had confirmed that full expensing and the £1m AIA limit would stay in place for the whole of this Parliament. She has, though, made some tweaks to other aspects of capital allowances. In particular, from 1 January 2026, there is a new 40% FYA for expenditure on new and unused general pool P&M, where the purchaser is unable to claim full expensing. It excludes assets for leasing overseas and cars. However, assets bought for leasing to a lessee who is resident in the UK do qualify, as long as the asset is not used for the purpose of earning income from a source outside the UK that is not within the charge to UK tax. Unincorporated businesses would only benefit from this new FYA on expenditure above the AIA limit of £1 million.

Zero-emission cars and electric vehicle charging points
The Government has again extended the period of availability of 100% FYA on zero-emission cars and electric vehicle charging points. This extension is for an extra year, running to 1 April 2027 (companies) and 5 April 2027 (income tax businesses). Any business thinking of changing its cars to electric ones should consider doing so before this up-front tax relief expires.

Structures and Buildings Allowance
This is unchanged, the rate remaining 3% p.a. of qualifying cost. If you are planning significant capital expenditure, make sure you understand how this will be treated for tax purposes. We are here to help, should you have any questions, please do get in touch.