First year allowance: rates, rules and 2026 changes

What a first year allowance is

A first year allowance is a capital allowance that lets a business deduct some or all of the cost of qualifying plant or machinery from its profits before tax. Plant and machinery covers items such as equipment, machinery and business vehicles. ^[1]

Whether a purchase may fit within capital allowance claims depends on what the item is, whether it is new and when it was bought.

First-year allowances sit alongside the Annual Investment Allowance, and if an item qualifies for more than one capital allowance, the business can choose which one to use.

Which first-year allowances are available

The 100% first-year allowance can only be claimed on certain plant and machinery bought new and unused, and it can be claimed in addition to another first-year allowance or the AIA as long as both are not claimed for the same cost.

A company investing in plant and machinery for use in a special tax site in a UK Freeport or Investment Zone can claim 100% first-year allowances, and may be able to claim full expensing or the 50% first-year allowance as well, but it cannot claim more than one allowance against the same expenditure and cannot normally claim on items bought to lease to other people or for use within a home it lets out.

Full expensing and the 50% first year allowance may be available to a company subject to Corporation Tax that incurred the expenditure on or after 1 April 2023. ^[2]

Full expensing deducts all of the cost of main rate plant or machinery, while the 50% first-year allowance deducts half of the cost of special rate plant or machinery.

For these two allowances, the plant or machinery must be new and unused, and it must not be a gift, a car, bought to lease to someone else (unless it is background plant or machinery within a building) or purchased in the accounting period the business activity ceases.

The 40% first-year allowance lets a business deduct 40% of the cost of qualifying plant or machinery from its profits before tax. To qualify for the 40% first-year allowance, plant or machinery must have been bought on or after 1 January 2026, be new and unused, qualify for the main rate of writing down allowance and not be a car.

For the 40% first-year allowance, writing down allowances can be claimed on the remaining 60% of the cost in the next accounting period.

Assets that miss out on the AIA and first-year allowances

Cars are the asset the rules single out: they do not qualify for the AIA, the super-deduction and 50% special rate first-year allowance, full expensing and the 50% first year allowance, or the 40% first year allowance.

Other vehicles are treated differently, and they may qualify for full expensing.

Cash basis also limits what can be claimed: if a sole trader or partnership uses cash basis, capital allowances can only be claimed on business cars.

The guide to the Annual Investment Allowance covers its other exclusions and how it is claimed.

Electric cars and the 100% first-year allowance

A new and unused electric car or car with zero CO2 emissions bought before April 2027 can qualify for 100% first year allowances, so the full cost can be deducted from profits before tax.

Other cars use writing down allowances to work out what can be claimed.

If a sole trader or partnership also uses a car outside the business, the claim is worked out based on the amount of business use.

The guide to capital allowances on electric cars covers emission bands, pools and how cars are treated more widely.

Equipment for electric vehicle charging points bought before April 2027 can also qualify for 100% first year allowances, if it is new and unused.

Capital allowance changes from 2026

Two changes in 2026 affect main rate plant and machinery. One is the 40% first-year allowance set out above.

The other is the main rate of writing down allowance, which changed from 18% to 14% on 1 April 2026 for Corporation Tax and on 6 April 2026 for Income Tax. ^[3]

If an accounting period includes the date the rate changed, a hybrid rate is worked out for that period, based on how much of the period is before the change and how much is after.

For a company paying Corporation Tax with an accounting period from 1 January 2026 to 31 December 2026, the hybrid rate is 14.99%. ^[3]

Claiming the allowance and the cost left over

Full expensing and the 50% first year allowances are claimed on the Company Tax Return. ^[2]

The 100% first-year allowance lets a business claim the full amount for certain plant and machinery in the year that it was bought, and full expensing and the 50% first-year allowance give their deduction in the year the item was bought.

Where value remains after the maximum amount of another allowance has been claimed, writing down allowances can be claimed on it. A business that does not want to claim the full value as a first year allowance can claim part of it using writing down allowances, at any time as long as it still owns the item.

With special rate plant or machinery, the balance left after the 50% first-year allowance is added to the special rate pool in the following accounting period to claim writing down allowances.

In most cases, the value of an item is what was paid for it.

To claim the 100% first-year allowance, full expensing, the 50% first-year allowance or the 40% first-year allowance, the claim must be made in the accounting period the item was bought.

Short and long accounting periods

For accounting periods less than a calendar year, the AIA, small pools allowance and writing down allowance are reduced, but this does not apply to first year allowances. The full amount of the first year allowance can be claimed if the business is still in business at the end of the accounting period.

For accounting periods longer than a calendar year but less than 18 months, those other allowances are increased, while a first year allowance is not proportionately increased. ^[4]

Accounting periods longer than 18 months are split into a 12 month period from the start and further periods of up to 12 months, with the allowances worked out for each period.