Beating the capital allowances rate reduction

Writing down allowances

Writing down allowances (WDAs) give tax relief for capital expenditure where first-year allowances cannot be claimed and, where the cash basis is used, where the expenditure is of a type for which a deduction is not permitted. For expenditure on cars (other than new zero emissions cars), WDAs are the only route for relief.

WDAs apply on a reducing balance basis, and different rates apply to main rate and special rate expenditure. Most items of plant and machinery are main rate assets, including cars with CO₂ emissions of 50g/km or less. Currently, main rate expenditure attracts relief of 18% per year. However, this is to be reduced to 14% per year from 6 April 2026 for income tax purposes and 1 April 2026 for corporation tax purposes.

Who’s affected?

As companies benefit from full expensing, and most businesses are entitled to the annual investment allowance (AIA) of £1m, the impact is limited. It will affect businesses purchasing cars with CO₂ emissions of 50g/km or less, those with brought forward balances and unincorporated businesses that aren’t entitled to the AIA or have exhausted it.

The reduction in the main rate from April 2026 will result in pool balances taking longer to receive full tax relief.

Hybrid rates

If a company’s year end is anything other than 31 March, the reduced rate impacts the rate used for the entire year, not just expenditure incurred post-1 April. In these circumstances, a hybrid rate applies to reflect the proportion of the chargeable accounting period that falls before and after 1 April.

Example. Joe operates his business through a company, J Ltd. Accounts are prepared to 30 June each year. On 1 May 2026, J Ltd buys a new hybrid car with CO₂ emissions of 20g/km, costing £36,000. J Ltd cannot use the AIA or full expensing to get full relief for the cost of the car. The expenditure is therefore added to the main rate pool, which has a balance of £40,000 on 1 July 2025. As the year to 30 June 2026 spans 1 April 2026, a hybrid rate applies. For that year, 274 days fall before 1 April 2026 and 91 days fall on or after 1 April 2026. Consequently, the hybrid rate is 17% ((274/365 x 18%) + (91/365 x 14%)). J Ltd is able to claim main rate WDAs for the year to 30 June 2026 of £12,920 (17% of (£40,000 + £36,000)).

If J Ltd’s year end was 31 March, the value of the car would have been subject to the lower rate of 14%, reducing the tax relief by more than £1,000.

Companies with year ends spanning 1 April 2026 are subject to a hybrid rate, regardless of when the expenditure is incurred. Therefore, there is no need to bring expenditure forward to pre-1 April 2026.

Planning for unincorporated businesses

There is some good news for unincorporated businesses. They are always taxed on a tax year basis, regardless of the date accounts are drawn to. This means there’s no need to make fiddly adjustments for hybrid rates as it is simply 18% for 2025/26 and 14% for 2026/27.

Bring any planned expenditure forward to pre- 6 April 2026 if it will be allocated to the main rate pool. There’s no change to the special rate (6%).