London, (Shahzad Ali) – UK businesses are poised to benefit from a substantial increase in investment due to the implementation of a new 40 per cent first-year capital allowance for plant and machinery, which takes effect from 1st ofJanuary. This measure reinforces the government’s commitment to transforming Britain into one of the most attractive environments globally for conducting business.

The policy, initially announced by Chancellor Rachel Reeves during Budget 2025, enables businesses to deduct 40 per cent of the cost of qualifying main-rate plant and machinery from their taxable profits in the year the investment occurs. This relief aims to support growth by enhancing cash flow and reducing the initial expenditure associated with investments.

The newly introduced allowance broadens access to advantageous tax reliefs, notably benefitting unincorporated businesses and assets acquired for leasing purposes that do not qualify for full expensing. It responds to persistent appeals from the business sector to expand upfront capital allowances to a wider array of assets and enterprises.

Commenting on the introduction of this relief, Chancellor Rachel Reeves stated that facilitating tax savings for investing businesses is crucial for fostering confidence and stimulating economic development.

“We are building upon the UK’s capital allowance framework — among the most generous globally — alongside measures such as capping Corporation Tax and fostering an environment conducive to scaling-up enterprises to attract investment. These initiatives will help establish a tax system that genuinely promotes growth,” she articulated.

The government intends to preserve existing incentives, including full expensing, which permits companies to claim 100 per cent capital allowances on qualifying main-rate plant and machinery within the first year. Under full expensing, companies can reduce their tax liability by up to 25 pence per pound invested.

According to official government data, the UK already ranks at the top among OECD countries for plant and machinery capital allowances, a testament to its competitive corporate tax framework.

This strategic move aligns with commitments outlined in the 2024 Corporate Tax Roadmap, under which the government has pledged to uphold key aspects of the UK’s corporate tax offer. This includes maintaining a 25 per cent Corporation Tax rate throughout the current Parliament, the lowest among G7 nations, while retaining attractive investment incentives.

Ministerial statements affirm that these reforms aim to promote long-term investment, enhance productivity, and bolster the UK’s reputation as a prime destination for both domestic and international businesses.