First Year Allowance (FYA) from 2026: help for SMEs & sole traders

If you’re a sole trader, part of a partnership or an SME director investing in equipment, machinery or other business assets, there’s good news – a new tax relief called the First Year Allowance came into force on 1st January 2026. It could help you in some situations by putting more money back in your pocket, quicker.

In this article, we take a close look at what’s changed, why it matters, and how you can make the most of it.

What’s the new 40% First Year Allowance?

From 1st January 2026, if you buy new (not second-hand) plant and machinery for your business, you may be able to claim 40% of the cost as a tax deduction straight away. Once you’ve done that, the remaining 60% goes into your capital allowances pool. You can then claim Writing Down Allowances (WDAs) over future years.

This new 40% FYA is a permanent addition to the UK’s capital allowances system – it’s not a temporary measure with an expiry date.

Why is this change significant?

When you get tax relief straight away, it improves your cash flow. As a result, you don’t have to wait years in order to claim the full cost of your equipment. Instead, you get a larger proportion up front.

Recap: the main tax reliefs for buying business assets

Before we delve into more detail into the new allowance, here’s a recap of the main options available in 2026.

• Annual Investment Allowance (AIA). This gives you 100% relief on qualifying plant and machinery, up to £1 million per year. It is available to sole traders, partnerships and companies. For most smaller businesses, this will cover everything you need.
• Full Expensing. This gives companies (not sole traders or partnerships) 100% relief on new main-rate plant and machinery, with no upper limit. This is permanent and very generous, but it doesn’t apply to assets bought for leasing, and unincorporated businesses can’t use it.
• The new 40% First Year Allowance. This fills the gaps. It’s available to both companies and unincorporated businesses (sole traders, partnerships, LLPs), including for assets bought for leasing. It applies to new, unused main-rate plant and machinery from 1st January 2026.
• Writing Down Allowances (WDAs). These give you gradual relief over time on whatever isn’t covered by the above. From April 2026, the main pool rate drops from 18% to 14%.

When will the new 40% First Year Allowance actually help you?

You’ll typically look at this relief when:

• You’ve already used your £1 million AIA for the year
• You’re a sole trader or partnership (so can’t use full expensing)
• You’re buying assets for leasing (which are excluded from full expensing)
• You want faster relief than WDAs alone would give

For most smaller businesses with capital spending under £1 million, the AIA will still be your first port of call – it gives 100% relief, which beats 40%.

However, if your spending exceeds £1 million, or if you’re in leasing, the new allowance is a genuine improvement on what was available before.

What qualifies for FYA?

Qualifies:

• New, unused plant and machinery (the “main rate” category)
• Assets bought for leasing (as long as it’s UK leasing – overseas leasing is excluded)
• Purchases by sole traders, partnerships, LLPs and companies

Doesn’t qualify:

• Second-hand or “nearly new” assets
• Cars
• Special rate items (things like integral building features, lifts, air conditioning systems)

Watch out: the Writing Down Allowance (WDA) rate is dropping

From April 2026, the main pool WDA rate falls from 18% to 14%.

• For companies (Corporation Tax): this takes effect from 1st April 2026
• For sole traders and partnerships (Income Tax): this takes effect from 6th April 2026

The upshot? The 40% First Year Allowance becomes relatively more valuable because the alternative – claiming WDAs on the full amount – is now slower.

If your accounting year straddles 1st and 6th April, you’ll need to use a hybrid rate. If you need help with calculating this, please talk to your THP accountant.

A real-world example

In May 2026, a sole trader buys £200,000 worth of new equipment. Their Annual Investment Allowance is already used up. They have two options.

Option 1. WDAs only (at the new 14% rate)

• Year 1 deduction: 14% × £200,000 = £28,000
• Pool carried forward: £172,000

Option 2. 40% First Year Allowance, then WDAs on the balance

• Year 1 FYA: 40% × £200,000 = £80,000
• Remaining balance to pool: £120,000
• Year 1 WDA on balance: 14% × £120,000 = £16,800
• Total Year 1 deduction: £96,800
• Pool carried forward: £103,200

That’s nearly £70,000 more relief in year one – a significant cash flow boost.

Electric vehicles: a separate (better) relief still exists

If you’re planning to buy a zero-emission car or install EV charging points, a 100% First Year Allowance is still available. This is extended until 31st March 2027 for companies, or 5th April 2027 for income tax purposes.

So, if you qualify for 100% relief, there’s no reason to settle for 40%.

A few helpful tips

1. Check your AIA first. For most SMEs, the £1 million AIA will cover everything. You’re likely to turn to the 40% FYA when you’ve gone past that limit or you can’t use it.
2. Make sure purchases are genuinely “new.” The relief only applies to new – meaning unused – assets. “Nearly new” typically counts as second-hand, and that’s excluded.
3. Separate the main rate from the special rate. If you’re doing a fit-out or refurbishment, some items (like air conditioning or lifts) fall into the special rate category and don’t qualify for the 40% FYA. Make sure you get this properly categorised early.
4. Consider future disposals. Faster relief upfront means a lower tax written-down value sooner. If you sell the asset later, you’re more likely to trigger a balancing charge. That’s not necessarily a problem, but it’s worth knowing.

How THP can help you

Capital allowances can get complicated, especially when you’re weighing up AIA, full expensing, the new 40% FYA, and Writing Down Allowances. If you arrange a tax planning review with a THP accountant, we can help make sure you’re claiming the right relief at the right time.