Unincorporated businesses to get 40% capital allowance boost

16th January 2026

Capital allowance boost

The 2025 Budget, announced on 26 November, brought good news for unincorporated businesses. The Chancellor introduced a new 40% first-year capital expenditure allowance, which is available from 1 January 2026 to sole traders, partnerships and lease hire companies.

This first-year allowance (FYA) is designed to offer a tax incentive for new main rate plant and machinery purchases that aren’t covered by existing reliefs such as the Annual Investment Allowance (AIA) and full expensing. It enables businesses to deduct 40% of the value of a qualifying capital purchase from their pre-tax profits in the year the purchase is made. Here, we explore the impact of the new relief and who would benefit.

Sole traders and partnerships with a high capital outlay

All businesses, whether they are incorporated or not, qualify for the £1 million AIA. As such, the full value of eligible capital purchases – up to an annual value of £1m – can be deducted from pre-tax profits.

Limited companies also benefit from the ‘full expensing’ allowance. This allows them to buy new and unused plant and machinery (excluding cars) with a value that exceeds the AIA limit. In addition, up to 50% of the purchase price of second-hand equipment can be offset against taxable profits.

However, these extensions do not apply to unincorporated businesses such as sole traders and partnerships. Until January 2026, capital investment relief for these organisations had been subject to a £1m cap. The new FYA therefore enables unincorporated businesses to offset 40% of the value of purchases above £1m against tax.

Benefits for contract hire and leasing businesses

Contract hire and leasing companies have hitherto been excluded from government efforts to boost capital expenditure, because neither the AIA nor full expensing covered assets that were purchased for leasing purposes. Now, new and unused assets bought for leasing purposes qualify for the 40% FYA, offering those companies access to the same tax relief benefits as other sectors.

Reducing the Writing-Down Allowance

The introduction of the 40% FYA comes in conjunction with a reduction in the writing-down allowance (WDA) from April 2026. This long-standing capital allowance enables organisations to offset a proportion of an asset’s value against taxable profits year by year. The main rate – which was set at 18% in 2012 – will be reduced to 14%, suggesting the government is moving towards a system of front-loading capital incentives to the year of purchase. This aligns with typical business preferences, since the relief is bigger, arrives sooner and is easier to account for.

The changes do not affect the WDA on the special rate pool which is currently 6%.

Help with capital allowance reliefs

If you think your business may qualify for the new 40% first-year allowance, it’s worth consulting a reputable accountant and assessing your capital expenditure plans. A professional can help you determine whether you are eligible for the relief and advise on how it could impact your tax situation and cash flow. Contact us today and move into 2026 with the confidence to grow.