Sole traders, partnerships and lease hire businesses will get a welcome relief on their equipment purchases come the new year as a new 40% first-year capital expenditure allowance becomes available on January 1st.
Announced as part of Budget 2025, this new first-year allowance (FYA) is aimed at providing a tax incentive for main rate plant and machinery purchases that aren’t covered by existing reliefs – namely, full expensing and the Annual Investment Allowance (AIA).
Like other FYAs, this new allowance will allow businesses to deduct a specified amount (in this case, 40%) of the value of an eligible capital purchase from profits before tax in the year the purchase is made. It applies to purchases of new plant and machinery (not second-hand), and excludes cars.
Here are two scenarios in which it could be used, and who will benefit.
Sole traders and partnerships with high capital outlay
All businesses, both incorporated and unincorporated, qualify for the £1 million AIA. This means that the full value of qualifying capital purchases up to an annual value of £1m can be deducted from profits before tax, regardless of what type of business you are.
For limited companies, the 100% deduction doesn’t stop at £1m. As long as you are buying new and unused plant and machinery (excluding cars), the ‘full expensing’ allowance has no ceiling. And if you buy second-hand equipment, you can still offset 50% of the purchase value against taxable profits.
But this extension doesn’t apply to unincorporated businesses like sole traders and partnerships. Up to now, capital investment relief for these entities has been capped at £1m. The new FYA is in part a concession to that, meaning unincorporated businesses can now offset 40% of the value of purchases above £1m against tax.
Assets acquired for leasing
Neither the AIA nor full expensing cover assets purchased for the purpose of leasing, meaning contract hire and other leasing companies have been excluded from government efforts to stimulate capital spending. New, unused assets bought for leasing do qualify for the new 40% FYA, giving leasing businesses access to the same benefits as other sectors in terms of accelerated tax relief (compared to the slower drip-drip relief of the writing-down allowance) and improved tax flow.
Winding down the Writing-Down Allowance
From April 2026, the writing-down allowance (WDA) main rate will be reduced from 18% to 14%. The WDA is a long-standing capital allowance that lets businesses offset a proportion of an asset’s value against taxable profits year by year, with the starting value for the calculation reduced by the same amount deducted from pre-tax profits each year (hence ‘winding down’).
The reduction in the WDA was announced alongside the expansion of the FYA regime, giving another indication of the government’s preference for front-loading capital incentives to the year of purchase. This is generally preferable for businesses, too, as it means the impact of the relief is bigger, arrives sooner and is easier to account for.
If you think you may qualify for the new 40% FYA, now is the time to re-examine your capital expenditure plans to see how it could impact your tax situation and cash flow. For advice on qualification criteria and how to claim the relief, contact one of our tax experts today.
