Full Expensing and UK Capital Allowances: A 2026 Guide for Owner-Managed Companies
Full expensing lets companies deduct the full cost of qualifying new plant and machinery from taxable profits in the year of purchase, and it is now a permanent part of the corporation tax system. This guide sets out how full expensing sits alongside the 50% special-rate allowance, the £1,000,000 Annual Investment Allowance and writing-down allowances, and explains the conditions, exclusions and the new 40% allowance for leased assets that took effect in 2026.
The capital allowances landscape in 2026
Capital allowances are the mechanism by which the tax system gives relief for money spent on assets that a business keeps and uses, such as machinery, tools, equipment and fixtures. Accounting depreciation is added back when a company works out its taxable profit, and capital allowances replace it with a statutory set of deductions. For an owner-managed company investing in equipment, the practical question is rarely whether relief is available but how quickly. The headline reliefs, full expensing and the Annual Investment Allowance, both give 100% relief in the year of spend, while writing-down allowances spread relief across many years. Choosing the right one, and meeting its conditions, is the difference between a deduction now and a deduction slowly. The rules changed again in 2026, so it is worth working from what is currently in force rather than from older guidance.
Full expensing: 100% relief on new main-rate plant and machinery
Full expensing is a 100% first-year allowance available to companies within the charge to corporation tax. It lets a company deduct the whole cost of qualifying new and unused main-rate plant and machinery from its taxable profits in the accounting period the expenditure is incurred, with no annual monetary cap. Main-rate plant and machinery covers the large majority of business equipment, from manufacturing machinery and commercial tools to computers, office furniture and most commercial vehicles that are not cars. Originally a temporary measure, full expensing is now a permanent feature of the corporation tax system, which removes the earlier pressure to bring spending forward before an expiry date. It is a company-only relief; sole traders and partnerships cannot claim it, though they have the Annual Investment Allowance instead.
An illustrative worked example
Consider a company that buys a qualifying new machine for £100,000 in its accounting period. Under full expensing it deducts the entire £100,000 from its taxable profits in that period. At the 25% main rate of corporation tax, that deduction reduces the tax bill by £25,000 in the year of purchase. Compare that with the alternative of putting the same asset into the main pool at the current 14% writing-down rate: the first year's deduction would be only £14,000, worth £3,500 in tax, with the remaining relief trickling out over many later years. Full expensing does not change the total relief a company eventually receives; it brings almost all of it into year one, which is a cash-flow advantage. This example is illustrative and assumes profits taxed at the main rate; a company taxed at a different effective rate would see a different figure.
The 50% first-year allowance for special-rate assets
Not all plant and machinery is main-rate. Certain assets fall into the special-rate pool, including integral features of a building such as electrical and lighting systems, cold water systems, heating and air-conditioning, lifts and escalators, along with long-life assets and thermal insulation. For new and unused special-rate assets, companies can claim a 50% first-year allowance in the year of purchase. The remaining 50% of the cost is then added to the special-rate pool and written down at that pool's rate in later years. Like full expensing, the 50% allowance is a permanent, company-only relief and does not carry an annual cap. It exists because special-rate assets would otherwise attract only slow relief, so the 50% up-front deduction meaningfully accelerates it.
The Annual Investment Allowance and where it goes further
The Annual Investment Allowance, or AIA, gives 100% relief on qualifying plant and machinery up to a limit of £1,000,000 a year, a level that has applied since 1 January 2019. Within that ceiling it does several things full expensing does not. It is available to unincorporated businesses, so sole traders and partnerships can use it. It covers second-hand and used assets, not only new and unused ones. And it extends to special-rate assets, including integral features, giving them 100% relief rather than the 50% first-year figure. For many owner-managed companies the AIA and full expensing overlap, but the AIA is the tool that reaches second-hand equipment and integral features at 100%. Because the limit is annual, companies planning large or lumpy purchases should watch the timing so that spending is not stranded above the £1,000,000 ceiling in a single period. Cars are excluded from the AIA.
Writing-down allowances after the April 2026 change
Where an asset does not qualify for a 100% or 50% first-year allowance, or where spending exceeds the AIA limit, the balance goes into a pool and is written down each year on a reducing-balance basis. The main pool rate was reduced from 18% to 14%, taking effect from 1 April 2026 for companies within the charge to corporation tax and 6 April 2026 for income tax businesses. The special-rate pool continues to be written down at 6%. So a £10,000 balance in the main pool now attracts a £1,400 deduction in the first year, £1,204 in the next, and so on. Accounting periods that straddle 1 April 2026 use a hybrid rate blended across the two periods. The reduction in the main-pool rate widens the gap between claiming a first-year allowance and letting an asset be written down slowly, which makes full expensing and the AIA more valuable in relative terms.
Cars, the new-and-unused condition, and leased assets
Two conditions catch companies out. First, cars are excluded from both full expensing and the AIA; a business car instead receives writing-down allowances at a rate that depends on its carbon dioxide emissions, with only zero-emission cars able to attract a 100% first-year allowance under separate rules. Second, full expensing applies only to new and unused assets, so a second-hand machine, however genuinely productive, cannot be full expensed; the route to 100% relief for used equipment is the AIA. On leasing, the position has moved. Rather than extending 100% full expensing to assets bought for leasing or rental, the government introduced a separate 40% first-year allowance, in force for expenditure incurred from 1 January 2026. It is available to businesses providing plant and machinery for leasing, covers new and unused assets, and specifically excludes second-hand assets, cars and overseas leasing. A company buying equipment to lease out should therefore look to this 40% allowance, not to full expensing.
Common questions
Can my company full expense a second-hand machine? No. Full expensing is restricted to new and unused main-rate plant and machinery. For used equipment, claim the Annual Investment Allowance instead, which gives 100% relief up to £1,000,000 a year and does cover second-hand assets. Does full expensing have an annual limit? No. Unlike the £1,000,000 AIA cap, full expensing and the 50% special-rate allowance have no annual monetary ceiling, so they suit large capital programmes. Is full expensing still temporary? No. It is now a permanent part of the corporation tax system, which is why capital planning no longer needs to be timed around an expiry date. These reliefs interact, and the right claim depends on the asset, its condition and the company's profit level, which is why the position is worth reviewing against the rules actually in force at the time of spend rather than once a year.
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This article is general information only and does not constitute tax advice. Figures and dates are current as at the date of writing; any worked example is illustrative. Always consult a qualified adviser before acting.