Capital allowances in 2026: what you can actually write off when you buy kit

Buy a van, a machine, a set of tools or ten laptops and the cost does not simply come off your profit the way a phone bill does. It goes through the capital allowances system, which decides how much of it you can deduct and when. For most of the last decade that system had one sensible answer for a small business: claim the Annual Investment Allowance and stop worrying about the rest.

In 2026 it grew two new moving parts. There is a new 40% first-year allowance from 1 January 2026, and the main rate of writing down allowances has been cut from April 2026. Neither is complicated, but knowing which applies to your purchase matters, because choosing the wrong route can leave a five-figure deduction dripping out of a pool for the next decade instead of coming off this year's tax bill.

The default answer is still the Annual Investment Allowance

The Annual Investment Allowance (AIA) gives a 100% deduction on qualifying plant and machinery, up to £1 million of spend a year. It is available to sole traders, most partnerships and limited companies alike, and the £1 million limit is now a permanent feature rather than a temporary boost that kept getting extended at the last minute.

For the overwhelming majority of UK small businesses that is the entire story. Spend £18,000 on kit this year and the AIA lets you deduct all £18,000 from your taxable profit in the same year. Two features make it the strongest relief on the table, and they are the reason it should still be your first thought: it covers second-hand equipment as well as new, and it covers special rate assets such as integral features in a building, thermal insulation and air conditioning — none of which the newer allowance touches.

What the new 40% first-year allowance actually does

From 1 January 2026 there is a 40% first-year allowance on new and unused plant and machinery that qualifies for the main rate. You deduct 40% of the cost in year one and the remaining 60% goes into your main pool, to be written down over the years that follow. It is open to companies and unincorporated businesses, it covers assets bought to lease out, and it excludes cars and anything second-hand.

Put that next to the AIA and the obvious question answers itself. Why would you take 40% when the AIA gives you 100%? For most small firms, you would not. The 40% allowance exists for the businesses the AIA does not reach: those spending more than £1 million a year on equipment, and those buying assets to lease out, which have historically been shut out of the fastest reliefs. It also takes over from full expensing, the 100% relief that was only ever available to companies, for main rate spending from 1 April 2026.

If your annual kit spend is comfortably under £1 million, the 40% allowance is mostly news about other people's tax bills. The Annual Investment Allowance is still the better answer.

The change nobody put in a headline: 18% becomes 14%

The second change is the one that quietly costs money. The writing down allowance on the main pool falls from 18% to 14% — from 1 April 2026 for corporation tax and 6 April 2026 for income tax. If your accounting period straddles that date a hybrid rate applies, worked out on the proportion of the period falling either side of the change. The special rate pool is untouched at 6%.

That matters because anything not claimed under the AIA or a first-year allowance ends up in a pool, and a pool running at 14% takes materially longer to give you your money back than one running at 18%. The practical effect is to raise the value of deliberately getting spend under the AIA, rather than letting it drift into a pool by default because nobody made the claim.

A worked example

Take a limited company — illustrative figures — that spends £40,000 on equipment in the year to 31 December 2026: £28,000 on a new machine and £12,000 on a second-hand van.

Claim the AIA on both and the whole £40,000 comes off taxable profit this year. At the 19% small profits rate of corporation tax that is £7,600 off the tax bill, in the same year the money left the bank account.

Now run the 40% route on the machine instead. Year one gives £11,200 on the machine, plus 14% of the £16,800 left sitting in the pool, which is £2,352. The van, being second-hand, gets no first-year allowance at all and goes straight into the pool for another £1,680. Total year-one deduction: £15,232, against the AIA's £40,000. Identical spend, identical business, and roughly £4,700 of tax deferred for years rather than saved now.

Cars are a separate world, and always have been

You cannot claim the AIA on a car, and the 40% allowance excludes cars too. A car goes into the main pool at 14% if it emits 50g/km of CO2 or less, or the special rate pool at 6% if it emits more than that. New and unused fully electric cars are the exception and attract a 100% first-year allowance.

Vans, lorries and motorcycles are not cars for this purpose. They count as plant and machinery and can take the AIA in full, which is why a £35,000 van and a £35,000 company car produce completely different tax outcomes from the same cheque. If you are weighing the two, the tax treatment of the vehicle is worth more attention than the badge on it.

Four questions to ask before you sign

One: is it a car? If yes, none of the above applies and you are into the pooling rules. Two: will your total qualifying spend this year land under £1 million? If yes, claim the AIA and stop reading. Three: is it second-hand, or is it a special rate asset like air conditioning or wiring? If so the AIA is the only 100% route open to you, so use it. Four: are you buying it to lease out, or have you genuinely used up your £1 million? Then the 40% first-year allowance is the one to raise with your accountant.

One timing point is worth knowing. The allowance follows the date the expenditure is incurred, which is normally the date the obligation to pay becomes unconditional rather than the date the invoice is settled. Straddling a year end with a large order is one of the few free bits of tax planning left, and it is worth a five-minute phone call before you sign rather than a rueful one afterwards.

If the purchase is being funded rather than paid for outright, the tax question and the finance question interact: asset finance versus buying outright covers that side of it, and what a lender actually asks for before approving a loan is worth reading before you apply. If you want the wider picture of which figures to keep in your head, start with five numbers every owner should know.

Common questions

Can I claim the Annual Investment Allowance on second-hand equipment?

Yes, and it is one of the main reasons the AIA still beats the newer reliefs for most small businesses. The Annual Investment Allowance applies to qualifying plant and machinery whether it is new or used, so a second-hand van, a used machine bought at auction or refurbished equipment can all attract a 100% deduction in the year of purchase, up to the £1 million annual limit. The 40% first-year allowance introduced on 1 January 2026 is restricted to new and unused assets, so second-hand kit gets nothing from it and would otherwise fall into the main pool at 14%. If you buy used equipment regularly, the AIA is the relief that matters to you.

What is the difference between the 40% first-year allowance and full expensing?

Full expensing gave companies a 100% deduction on new and unused main rate plant and machinery, and it was available only to businesses paying corporation tax. The 40% first-year allowance replaces it for main rate expenditure from 1 April 2026, and the trade-off is deliberate: the rate falls from 100% to 40%, but the relief opens up to unincorporated businesses and to assets bought for leasing out, which full expensing never covered. For a sole trader or partnership the change is a gain, since they were excluded before. For a company spending above the £1 million AIA limit it is a straightforward reduction in the year-one deduction.

Does the cut to 14% affect equipment I already own?

Yes. The writing down allowance is applied to the balance of your pool each year, not fixed at the rate in force when you bought the asset. So kit purchased in earlier years and still being written down will attract 14% a year rather than 18% once the change takes effect from 1 April 2026 for corporation tax or 6 April 2026 for income tax. Nothing is lost permanently, because the pool balance is still relieved eventually, but the relief arrives more slowly. Businesses with large pool balances carried forward will feel it as a slightly higher tax bill each year for several years.

What happens if my accounting period is shorter than 12 months?

The £1 million Annual Investment Allowance is proportionately reduced. A six-month accounting period gets six months' worth, so £500,000, and a three-month period gets £250,000. This catches out new companies whose first period runs to an odd date, and businesses that shorten a period to change their year end. Writing down allowances are scaled the same way. In practice the reduced limit is still far above the annual spend of most small businesses, so it rarely bites, but it is worth checking before a large purchase in a short period. Long periods of more than 12 months are split into separate periods for allowance purposes.