Corporation Tax 2025: Full Expensing Maintained & New 40% First Year Allowance
Corporation Tax 2025: Full Expensing Maintained & New 40% First Year Allowance
Quick Navigation
Key Takeaways from Budget 2025
- Corporation tax rate remains at 25% – the lowest in the G7
- Full Expensing retained – 100% first-year deduction for plant & machinery
- New 40% First Year Allowance introduced from 1 January 2026 for main rate assets
- Main rate Writing Down Allowances reduced from 18% to 14% from April 2026
- Significant cashflow benefits for businesses investing in qualifying assets
Budget 2025: Corporation Tax Changes Overview
Chancellor Rachel Reeves' Budget 2025 announcement on 26 November 2025 brought significant clarity to the UK's corporation tax landscape. Whilst maintaining the competitive 25% corporation tax rate—the lowest in the G7—the government has introduced important changes to capital allowances that will impact how UK businesses claim tax relief on capital expenditure.
These changes are designed to continue incentivising business investment whilst balancing the government's fiscal objectives. For SMEs, manufacturers, technology firms, and any business making significant capital investments, understanding these changes is crucial for effective tax planning and cashflow management.
Full Expensing: Continued 100% Relief
What Is Full Expensing?
Full Expensing, introduced in April 2023, allows companies to claim 100% tax relief on qualifying expenditure on plant and machinery in the year of investment. This means businesses can deduct the full cost of qualifying assets from their taxable profits immediately, rather than spreading the relief over several years.
Budget 2025 Confirmation
The Budget confirms that Full Expensing will be retained as previously planned. This provides certainty for businesses planning major capital investments and reinforces the UK's commitment to supporting business investment.
Qualifying Assets for Full Expensing
Full Expensing applies to:
- Main pool plant and machinery – machinery, equipment, and vehicles used in the business
- New (not second-hand) assets only
- Assets for use in the UK (excludes assets for leasing overseas)
- Corporate investors – limited companies within the scope of corporation tax
- Cars (subject to separate CO2-based rules)
- Second-hand assets
- Assets for leasing overseas
- Long-life assets (expected useful economic life exceeding 25 years)
- Assets eligible for structures and buildings allowance
50% First Year Allowance for Special Rate Assets
Alongside Full Expensing for main pool assets, there's a 50% First Year Allowance available for special rate assets, including:
- Long-life assets
- Integral features of buildings (lifts, heating systems, electrical systems, etc.)
- Thermal insulation
New 40% First Year Allowance: The Game Changer
What's New from 1 January 2026?
Budget 2025 introduces a new 40% First Year Allowance (FYA) for qualifying main rate expenditure. This is a significant addition to the capital allowances regime and will benefit a wider range of businesses and asset types than Full Expensing.
Key Features of the 40% FYA:
- Applies from 1 January 2026 (corporation tax) and 6 April 2026 (income tax)
- Available on main rate assets that don't qualify for Full Expensing
- Includes assets for leasing – a major departure from Full Expensing rules
- Available to unincorporated businesses – sole traders and partnerships
- Applies to both new and second-hand assets
Who Benefits from the 40% FYA?
The new 40% allowance particularly benefits:
- Sole traders and partnerships who couldn't access Full Expensing
- Leasing companies investing in plant and machinery for rental
- Businesses purchasing second-hand equipment
- Companies with mixed qualifying/non-qualifying expenditure
Reduction in Writing Down Allowances
To balance the introduction of the 40% FYA, the government is reducing the main rate Writing Down Allowances (WDA) from 18% to 14% from April 2026. This affects the ongoing annual allowances for assets that don't qualify for first-year reliefs.
| Relief Type | Before April 2026 | From April 2026 |
|---|---|---|
| Full Expensing (new main pool assets) | 100% | 100% (retained) |
| New 40% FYA | N/A | 40% |
| Main pool WDA (annual) | 18% | 14% |
| Special rate pool WDA | 6% | 6% (unchanged) |
Who Is Affected by These Changes?
1. Small and Medium-Sized Enterprises (SMEs)
SMEs investing in equipment, machinery, IT systems, and vehicles will benefit from:
- Immediate 100% relief on qualifying new plant and machinery through Full Expensing
- 40% upfront relief on assets that don't qualify for Full Expensing
- Improved cashflow from accelerated tax relief
- Enhanced competitiveness through the lowest G7 corporation tax rate
2. Manufacturing & Industrial Businesses
Manufacturers stand to gain significantly as they typically invest heavily in:
- Production machinery and equipment
- Computer-controlled manufacturing systems
- Packaging and processing equipment
- Quality control and testing equipment
The combination of Full Expensing and the 40% FYA means manufacturers can substantially reduce their tax bills in investment years, freeing up capital for further growth.
3. Technology & Digital Businesses
Tech firms investing in:
- Servers and data centre equipment
- Computer hardware and networking infrastructure
- Specialist software and equipment
- R&D equipment and testing facilities
Can leverage these allowances to reduce the effective cost of critical infrastructure investments.
4. Professional Service Firms & Partnerships
Unincorporated businesses—law firms, accountancy practices, consultancies operating as partnerships—can now access the 40% FYA for their capital investments, which wasn't possible under Full Expensing alone.
5. Leasing & Finance Companies
The 40% FYA specifically includes assets for leasing, opening up significant tax planning opportunities for:
- Equipment leasing companies
- Vehicle fleet operators
- Plant hire businesses
- Finance providers offering asset finance
Cashflow Impact: Why This Matters
The Cashflow Advantage
Capital allowances aren't just about reducing tax bills—they're about cashflow timing. The faster you can claim relief, the sooner you reduce tax payments and free up cash for reinvestment.
Cashflow Comparison: 18% WDA vs 40% FYA
Consider a £100,000 equipment purchase:
Under old 18% WDA system:
- Year 1: £18,000 relief (£4,500 tax saving at 25%)
- Year 2: £14,760 relief (£3,690 tax saving)
- Year 3: £12,103 relief (£3,026 tax saving)
Under new 40% FYA:
- Year 1: £40,000 relief (£10,000 tax saving at 25%)
- Year 2: £8,400 relief (£2,100 tax saving)
- Year 3: £7,224 relief (£1,806 tax saving)
Cashflow benefit: £5,500 additional tax saving in Year 1
Strategic Timing Considerations
With the 40% FYA starting on 1 January 2026, businesses should consider:
- Accelerating planned purchases to capture the allowance in the 2025-26 tax year
- Timing large equipment orders to maximise first-year relief
- Reviewing lease vs. purchase decisions in light of the new allowances for leased assets
- Coordinating with other capital allowances such as Annual Investment Allowance (AIA)
The Annual Investment Allowance (AIA)
Don't forget: the £1 million Annual Investment Allowance remains in place, providing 100% relief on qualifying expenditure up to £1 million per year. This applies to both incorporated and unincorporated businesses and can be used alongside Full Expensing and the 40% FYA.
Worked Capital Expenditure Examples
Example 1: Manufacturing Company - Full Expensing
Scenario: ABC Manufacturing Ltd purchases new production machinery costing £500,000 in February 2026.
Result: ABC Manufacturing receives immediate tax relief of £125,000, significantly improving cashflow in the year of investment. The net cost of the machinery after tax relief is effectively £375,000.
Example 2: Partnership - 40% FYA Benefit
Scenario: Jones & Partners LLP (a legal partnership) invests £200,000 in new office IT infrastructure and equipment in March 2026. As an unincorporated business, they cannot access Full Expensing.
Alternative scenario if AIA already used elsewhere:
Result: The partnership receives £36,000 tax relief in Year 1 under the new 40% FYA, compared to only £16,200 under the old 18% WDA system—an additional £19,800 in first-year relief.
Example 3: Mixed Investment Portfolio - Optimising Reliefs
Scenario: TechGrow Ltd makes the following investments in the year ending 31 March 2027:
- New server equipment: £400,000
- Second-hand machinery: £150,000
- Company cars (low CO2): £80,000
- Integral features (air conditioning): £200,000
Optimal relief strategy:
Result: By strategically applying different allowances to different asset types, TechGrow Ltd secures £160,000 in tax relief in year one on total investments of £830,000—a 19.3% immediate return via tax savings.
Example 4: Leasing Company - New Opportunity
Scenario: Midlands Equipment Leasing Ltd purchases £300,000 of construction equipment in January 2026 specifically for leasing to customers.
Previous position: Not eligible for Full Expensing (assets for leasing excluded). Limited to 18% WDA.
New position from 1 January 2026:
Result: The leasing company benefits from £16,500 additional tax relief in year one, significantly improving the economics of their leasing business and providing funds for further asset acquisition.
Tax Planning Strategies for 2026 and Beyond
1. Timing Your Capital Investments
With the 40% FYA starting on 1 January 2026, businesses should:
- Bring forward qualifying purchases to the period January-March 2026 to capture relief in the 2025-26 tax year
- Consider the reduction in WDA from 18% to 14% when planning multi-year investments
- Coordinate with financial year ends to maximise relief in high-profit years
2. Optimising Asset Classification
Ensure assets are correctly classified to claim the highest available relief:
- New qualifying plant and machinery → Full Expensing (100%)
- Assets for leasing, second-hand equipment → 40% FYA
- First £1m of any qualifying spend → Annual Investment Allowance (100%)
- Special rate assets → 50% FYA or 6% WDA
3. Incorporation Decisions
The extension of enhanced reliefs to unincorporated businesses (via the 40% FYA) may influence incorporation timing decisions. Consider:
- Tax rate differentials between income tax and corporation tax
- Access to Full Expensing (companies only) vs 40% FYA (available to all)
- Administrative and compliance costs
- Wider commercial and succession planning factors
4. Lease vs. Purchase Decisions
The inclusion of leased assets in the 40% FYA regime changes the tax dynamics of lease-versus-purchase decisions. Businesses should reassess whether to:
- Purchase equipment outright (accessing Full Expensing or 40% FYA)
- Finance through hire purchase (capital allowances available)
- Operating lease (rental costs fully deductible but no capital allowances)
5. Group Relief Planning
Companies within a group structure should consider:
- Which group company makes capital purchases to optimise tax relief
- Intra-group transfer pricing on equipment
- Group relief opportunities to utilise enhanced allowances effectively
Important: Anti-Avoidance Rules
Be aware of anti-avoidance provisions that may restrict relief in certain circumstances:
- Connected party transactions at non-arm's length prices
- Sale and leaseback arrangements
- Temporary use of assets
- Changes in company ownership following asset acquisition
Always seek professional advice when undertaking complex transactions.
Action Steps for Your Business
To maximise the benefits of these Budget 2025 corporation tax changes:
- Review your capital expenditure plans for the next 12-24 months
- Identify which reliefs apply to each planned purchase
- Model the cashflow impact of different investment timing scenarios
- Consider bringing forward strategic investments to capture enhanced reliefs
- Review your asset register to ensure historical claims are correct
- Reassess lease vs purchase decisions in light of the new 40% FYA for leased assets
- Update your financial forecasts to reflect accelerated tax relief
- Coordinate with year-end tax planning to optimise overall tax position
Don't Leave Money on the Table
Many businesses fail to claim capital allowances they're entitled to, either through lack of awareness or poor record-keeping. The Budget 2025 changes make it more important than ever to get this right.
Common missed opportunities include:
- Embedded fixtures in commercial property purchases
- IT and telecoms infrastructure
- Heating, ventilation, and air conditioning systems
- Energy-efficient and environmental equipment
- Research and development equipment
Expert Corporation Tax Advice Tailored to Your Business
Navigating corporation tax and capital allowances can be complex. The Budget 2025 changes create both opportunities and pitfalls—get expert guidance to ensure you're claiming every relief you're entitled to.
At MA & Co Accountants, we specialise in helping UK businesses optimise their tax position whilst maintaining full HMRC compliance.
Book Your Free 15-Minute Consultation Visit MA & Co AccountantsOur expert team will review your specific circumstances and create a tailored tax strategy to maximise your capital allowances and minimise your tax liability.
Frequently Asked Questions
Does Full Expensing apply to second-hand assets?
No, Full Expensing only applies to new (not second-hand) qualifying plant and machinery. However, second-hand assets may qualify for the new 40% FYA from 1 January 2026, or the £1 million Annual Investment Allowance.
Can sole traders claim Full Expensing?
No, Full Expensing is only available to companies within the scope of corporation tax. However, sole traders and partnerships can claim the new 40% FYA from 1 January 2026 (6 April 2026 for income tax purposes), as well as the Annual Investment Allowance.
What happens if I exceed the £1 million Annual Investment Allowance?
For companies, expenditure above £1 million on qualifying new plant and machinery can benefit from Full Expensing (100% relief). Assets that don't qualify for Full Expensing may qualify for the 40% FYA. Any remaining expenditure attracts Writing Down Allowances at 14% (or 6% for special rate assets).
Are electric vehicles covered by these changes?
Company cars are subject to separate CO2-based capital allowances rules and don't benefit from Full Expensing or the 40% FYA. However, 100% FYAs for zero-emission vehicles have been extended until 31 March 2027 (corporation tax) / 5 April 2027 (income tax).
Can I claim capital allowances on assets I lease to customers?
Yes, this is a significant change from Budget 2025. The new 40% FYA specifically includes assets acquired for leasing, whereas Full Expensing excludes them. This is particularly beneficial for leasing companies and businesses with hire fleets.
What if my accounting year end doesn't align with the effective dates?
For companies with year ends that straddle 1 January 2026 or 1 April 2026, time-apportionment rules will apply. Professional advice is recommended to ensure you claim the maximum relief available.
Do these reliefs apply in Scotland, Wales, and Northern Ireland?
Yes, corporation tax and capital allowances are reserved matters, so these rules apply throughout the United Kingdom. However, income tax treatment for unincorporated businesses may differ in Scotland due to devolved income tax powers.
Can I still claim capital allowances if I make a tax loss?
Yes, capital allowances contribute to calculating your taxable profit or loss. If allowances result in a loss, that loss can typically be carried forward to reduce future profits, carried back to previous years (subject to restrictions), or surrendered to group companies.
Conclusion: A Competitive Corporation Tax Regime
Budget 2025's corporation tax announcements strike a balance between maintaining the UK's competitive position—with the lowest corporation tax rate in the G7—and ensuring fiscal sustainability through adjustments to capital allowances.
The retention of Full Expensing provides certainty for businesses making major capital investments, whilst the introduction of the 40% First Year Allowance extends enhanced relief to a wider range of businesses and asset types than ever before.
For UK businesses—whether you're an SME investing in equipment, a manufacturer expanding capacity, a technology firm building infrastructure, or a partnership upgrading facilities—these changes represent significant opportunities to reduce tax bills and improve cashflow.
The changes take effect soon—1 January 2026 for the 40% FYA and 1 April 2026 for the WDA reduction—so there's limited time to optimise your 2025-26 tax position.
Get Your Corporation Tax Strategy Right
Don't navigate these changes alone. Our experienced team at MA & Co Accountants stays up-to-date with every Budget announcement and HMRC guidance update to ensure our clients pay the right amount of tax—no more, no less.
We offer:
- Corporation tax planning and compliance
- Capital allowances reviews and claims
- Cashflow forecasting and tax provisioning
- Strategic tax advice for growing businesses
- Year-end tax planning and optimisation
Let's discuss how Budget 2025's corporation tax changes affect your business and create a plan to maximise your allowances.
Comments
Post a Comment