Budget 2025: writing down allowance reduced to 14%

How Budget 2025 Impacts Your Tax Relief Strategy

Writing Down Allowance Cuts Explained

In the Autumn Budget 2025, the government announced a significant change to how businesses can claim tax relief on capital investments. The main rate of the writing down allowance (WDA) for plant and machinery will be cut from 18% to 14% per year effective April 2026. Writing down allowances – a type of capital allowance – let you deduct a percentage of an asset’s value from your profits each year, providing tax relief over time. According to the Chancellor, this adjustment is intended to “incentivise future investment and encourage growth” in the UK economy, albeit by spreading tax relief over a longer period for businesses. Alongside the WDA reduction, a new 40% first-year allowance (FYA) is being introduced from January 2026 to boost upfront relief on qualifying investments. Below we break down what these changes mean, why they were made, and how your business can respond.

Writing Down Allowance Cut to 14% from April 2026

Understanding Annual Capital Allowances

Writing down allowance is the standard annual deduction rate for capital expenditures that don’t qualify for full upfront write-off. It’s essentially the tax system’s replacement for depreciation, allowing businesses to gradually write off the cost of assets like equipment and machinery against taxable profits. For over a decade the main rate WDA has been 18% per year on a reducing balance basis, meaning each year you could deduct 18% of the remaining value of eligible assets in your “main pool.”

Starting 1 April 2026 for companies (and 6 April 2026 for unincorporated businesses), the main pool WDA rate will drop to 14%. This change applies to plant and machinery that fall into the main rate pool (generally most standard business equipment). The special rate pool – which covers longer-life assets and certain high-emission cars – remains at 6% and is not changing. If your business’s accounting period spans the effective date (for example, a year-end straddling April 2026), a hybrid WDA rate will be used to apportion the allowance before and after the change. In practice, this means some purchases made just before April 2026 could end up with slightly lower relief than they would have under the old rate if your fiscal year overlaps the change.

How the 14% WDA Affects Tax Relief

Crucially, reducing the WDA to 14% does not eliminate your tax relief on investments – you will still eventually deduct the full cost of qualifying assets from your profits. However, the relief will be spread out over a longer period. A lower annual percentage means it takes more years to write down most of an asset’s value for tax purposes. In other words, the tax savings are deferred, which delays the timing of relief a business receives. This slower rate could affect cash flow and the net present value of tax relief on large investments. It’s a notable change for businesses that rely on gradual capital allowances beyond any upfront allowances.

New 40% First-Year Allowance Introduced in 2026

Immediate Tax Relief with FYA

To soften the impact of the slower WDA and to encourage immediate investment, the Budget also introduces a new 40% First-Year Allowance (FYA) for qualifying capital expenditure. First-Year Allowances provide an upfront deduction in the year you purchase an asset, giving a larger immediate tax write-off than the standard WDA. Starting 1 January 2026, businesses investing in main rate plant and machinery assets can claim 40% of the cost as an immediate deduction in the first year. The remaining 60% of the asset’s value would then go into the normal pool to be written down at the 14% rate in subsequent years (details to be confirmed in the Finance Bill).

This 40% FYA is intended to “accelerate relief in the year of investment” for expenditures that don’t qualify for 100% relief under existing schemes. Notably, it has fewer restrictions than previous FYAs, making it available to a broader range of businesses. In particular, the new FYA will be available to unincorporated businesses and leasing companies, who have been excluded from some recent incentives like “full expensing”. This means if you’re, say, a sole trader or partnership, or a business that buys assets to lease out, you can take advantage of the 40% upfront write-off on new qualifying assets.

FYA Eligibility and Exceptions Explained

However, there are important exceptions to note. Second-hand assets and cars are excluded from the 40% first-year allowance, similar to how they’re treated under full expensing rules. Additionally, assets purchased for leasing overseas are not eligible (the allowance is designed to spur domestic investment). Most other new and unused plant or machinery purchases will qualify, including those for leasing within the UK. This effectively provides a middle-ground incentive: not full expensing, but a significant upfront deduction to boost investment in cases where the full 100% write-off isn’t available or chosen.

For example, if your company buys a piece of equipment for £100,000 in 2026 that isn’t covered by the Annual Investment Allowance (AIA) or full expensing, you could claim £40,000 as a deduction immediately under the new FYA, and the remaining £60,000 goes into your 14% WDA pool. This accelerated relief gives a boost to your first-year tax savings, helping offset the reduction in the annual WDA rate. The government’s policy objective is that by combining a lower ongoing WDA with this targeted upfront allowance, businesses are still incentivised to invest in new assets, especially in scenarios where previously they only had the slower relief.

Impact on Businesses and Investment

How the Reduced WDA Rate Affects Different Business Types

From a business perspective, these changes to capital allowances have mixed implications depending on your circumstances. On the one hand, many businesses may see little difference in practice, because they can still write off most or all of their qualifying capital spending using existing upfront reliefs like the £1 million AIA or the full expensing regime (now permanent) rather than relying on WDAs. Companies that plan capital investments strategically often ensure they make use of the AIA (which gives 100% relief on up to £1m of qualifying spend per year) or the temporary full expensing (100% deduction for companies on new main-rate assets) for immediate write-off. Those businesses will continue to get full relief in the year of purchase, and thus won’t be affected by a lower WDA rate on new investments.

Impact of 14% WDA on Businesses

On the other hand, businesses that do rely on writing down allowances over multiple years will feel the change. This includes firms with large capital expenditures exceeding the AIA limit, companies that had remaining pools of assets still being written down from prior years, or investments in assets that don’t qualify for full expensing (such as used equipment or most vehicles). Such businesses will now face a slower recovery of their costs through tax relief. Over time, the reduction of WDA from 18% to 14% effectively means the government is giving out tax relief more slowly, which helps the Exchequer’s short-term revenues. In fact, this measure is expected to raise an additional £1.0–1.5 billion per year for the Treasury by 2027–28 onwards – money that, under previous rules, would have been kept by businesses in the form of faster tax write-offs. For context, that’s a significant tightening of relief, roughly equivalent to removing £1.5bn of business tax allowances in those years.

Why the Leasing Industry May Be Most Affected

Some industry experts have cautioned that slowing down capital allowances in this way could deter long-term investment. Businesses, especially those with tight margins, might find it harder to justify large capital projects if the tax savings are stretched over a longer horizon. The CEO of one accountancy group noted that removing £1.5bn in relief at a time when firms are managing rising costs could make long-term investment harder, not easier. However, he also emphasized that investment doesn’t have to stall – companies that take a longer-term view and leverage all available incentives can still find paths to growth even in a tighter fiscal environment.

It’s worth noting that the impact will not be uniform across all sectors. For example, the leasing industry is one area likely to be hit by the WDA cut. Leasing businesses typically buy equipment to rent out and have been unable to use full expensing (which explicitly excluded assets for leasing), so they depend on writing down allowances for relief. A lower WDA means leasing firms will see slower tax relief on the assets they acquire, potentially affecting their business models or pricing. The government acknowledged this and specifically made the new 40% FYA available to assets used for leasing to give that sector some upfront relief. Even so, after the first year, lessor companies will be back to the lower annual 14% write-down, which could impact the economics of leasing arrangements going forward.

By contrast, a company that consistently invests in new equipment and can use full expensing or the AIA may scarcely notice the WDA change for new purchases – they’ll still be writing off most expenditures immediately. Small businesses purchasing within the AIA limit each year will likewise remain unaffected, as they will continue claiming 100% deductions up front. Their only exposure to the 14% rate might be on older asset pools if any remain. In short, businesses that plan to maximize available reliefs will mitigate the effect of the WDA cut, whereas those that routinely have expenditures beyond those limits, or ineligible assets, will face a modest tax timing disadvantage.

Why the FYA May Not Fully Offset the Lower WDA

It’s also important to temper expectations regarding the 40% first-year allowance. While definitely a welcome boost, the FYA is a one-time benefit – it gives a larger deduction in the first year, but does not change the overall amount of relief you can get on an asset. If an asset doesn’t qualify for full expensing or AIA, the 40% FYA simply front-loads some of the relief, with the rest to follow in later years at 14%. This means it may not fully offset the impact of the reduced WDA in the long run for every business. As one tax expert pointed out, the new 40% FYA will only directly benefit investments in their first year, and businesses shouldn’t assume the headline first-year relief will compensate across the board for a lower annual rate thereafter. Each business will need to model out the effects based on their investment plans – for some large or ongoing capital programs, the slower 14% write-down on the back end could outweigh the initial 40% bump. In other cases (especially one-off investments where 40% of a big spend is accelerated), the net present value of the relief might actually improve slightly despite the lower subsequent rate.

Overall, aside from the writing down allowance change, the Budget 2025 package had several business-friendly measures (such as making full expensing permanent and keeping other tax rates steady), so many companies found the budget more positive than anticipated. But this particular adjustment to WDAs is a key point for any business with significant capital assets. It underscores the importance of proactive tax planning: ensuring you claim the optimal relief at the optimal time.

Planning Ahead: Navigating the Writing Down Allowance Changes

How Businesses Can Prepare Before 2026

With these changes on the horizon (taking effect in 2026), businesses have a window of time to plan and adjust their strategies. Here are some steps to consider to maximise your capital allowances and manage the impact of the WDA reduction:

Review your capital expenditure plans

Review your capital expenditure plans: Look at upcoming investments in plant and machinery. Will accelerating any purchases into 2025 (while the WDA rate is still 18%) benefit your tax position? Conversely, would delaying some investments to 2026+ make sense to take advantage of the new 40% FYA? Every business is different, so it’s worth doing the math for major planned purchases.

Utilise full expensing and AIA wherever possible: These are still the most generous reliefs. Ensure you’re making the most of the Annual Investment Allowance (up to £1m of qualifying spend at 100% each year) and, if you’re a company, the permanent full expensing regime for new main-rate assets. By using these, you can largely sidestep the WDA rate issue for new investments, since you’ll get immediate deductions. Many businesses will continue to claim all their qualifying spend in the year incurred using AIA or full expensing, thus nullifying the effect of the 14% rate on those assets.

Leverage the 40% First-Year Allowance

Leverage the 40% First-Year Allowance: For expenditures that don’t qualify for AIA or full expensing (for example, assets purchased for leasing, or expenditures above your AIA limit), plan to take advantage of the 40% FYA from January 2026. This will give your business a significant upfront deduction and help maintain cash flow. Be mindful of the exclusions (no second-hand assets, no cars, etc.) and consider the FYA in your budgeting for 2026 and beyond.

Model the long-term tax impact: It’s advisable to run projections comparing the status quo vs. the new regime for your depreciation/tax relief. Identify if the slower write-down will materially affect your tax bills in later years. For ongoing capital-intensive operations, a financial model can show whether the 40% upfront allowance truly makes up for the reduced annual allowances over the asset life. This insight will inform whether you should alter your investment timing or financing decisions.

Consider timing for hybrid periods

Consider timing for hybrid periods: If your accounting period straddles April 2026, remember that transitional hybrid rates will apply. You might get effectively slightly less than 18% even on expenditures before April 1 if your year-end crosses the change. Plan accordingly for purchases around that cutoff – if maximizing first-year relief is crucial, aligning purchase dates with your year-end or the allowance start dates could avoid dilution of relief.

Seek professional advice: Tax rules around capital allowances can be complex, and the optimal strategy may not be obvious. This is a great time to talk to your accountant or tax advisor about how the writing down allowance changes will affect your specific business and what actions you can take.

Book Your Free Consultation with Naail & Co

Get in touch with Naail & Co to book a free initial consultation. Our team of chartered tax advisors can help you navigate these changes and ensure you’re making the most of all available allowances and reliefs. We will work with you to map out a tax-efficient investment plan, whether that means adjusting the timing of asset purchases, leveraging the new 40% FYA, or utilising other incentives. Proactive planning now can save you significant tax costs down the line. Contact Naail & Co today to discuss how the Budget 2025 changes – including the writing down allowance cut – could impact your business, and let us help you find the best path forward under the new rules.

Conclusion

Strategic Planning for Capital Allowances

The reduction of the main rate writing down allowance to 14% will slow the pace of tax relief on capital assets, but businesses can still achieve full relief through a combination of upfront allowances and strategic planning. With the addition of the 40% first-year allowance, there are new opportunities to capture tax savings early on. By understanding these changes and adjusting your approach, you can continue to invest in growth while minimising any adverse tax impact. As always, staying informed and planning ahead is key – and if you need guidance, Naail & Co is here to help you make sense of it all.

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FAQs on Writing Down Allowance Reduced to 14%

The writing down allowance is a form of capital allowance that allows businesses to deduct a percentage of the value of qualifying assets from their taxable profits each year. It’s particularly useful when full expensing or the Annual Investment Allowance isn’t available. From April 2026, the main rate writing down allowance will reduce from 18% to 14%.

The reduction in the writing down allowance from 18% to 14% will take effect on 1 April 2026 for companies and 6 April 2026 for unincorporated businesses. Businesses with accounting periods that span these dates will apply a hybrid rate.

A lower writing down allowance means businesses will receive tax relief on capital assets over a longer period, potentially impacting cash flow and investment planning. While total relief remains available, the timing of that relief will shift.

No. The reduced writing down allowance rate of 14% applies to assets in the main pool, typically covering standard plant and machinery. Special rate assets like long-life equipment remain at the 6% rate. Cars and second-hand assets may fall under different rules.

The writing down allowance provides gradual annual deductions, while the new 40% first-year allowance (FYA), available from January 2026, gives an immediate deduction of 40% of qualifying expenditure. The remaining balance enters the main pool to be written down at 14%.

Yes, but typically you’ll only use the writing down allowance on expenditure that exceeds the Annual Investment Allowance (AIA) or doesn’t qualify for full expensing. It serves as a fallback for tax relief when other incentives are fully used or unavailable.

Businesses with large-scale or ongoing capital investments, especially in sectors like manufacturing, logistics, and leasing, may feel the most impact. These firms often rely on writing down allowances for relief when full expensing or AIA doesn’t cover all spend.

Yes, leased assets typically fall into the main pool and qualify for the writing down allowance. The government has also confirmed that the new 40% first-year allowance will be available for assets leased within the UK, offering additional upfront relief.

To prepare for the writing down allowance cut, review your capital expenditure plans, consider the timing of asset purchases, and model out the tax impact of deferring vs. accelerating investment. Working with a qualified tax advisor is key to optimising relief.

Get in touch with Naail & Co to book a free initial consultation. Our tax experts can help you navigate the upcoming changes to the writing down allowance and develop a tailored investment strategy that maximises your capital tax relief.