The impact of changes to capital allowances on farming and rural businesses
By Andrew Heskin, Partner, and ARA specialist
The recent changes to capital allowances, announced in the 2025 Autumn Budget, could have important implications for farming businesses and contractors, as well as for rural enterprises more broadly.
With a reduction in the rate of writing-down allowances (WDAs) and the introduction of a new first-year allowance (FYA), farming and rural businesses may need to review their plant and machinery investment plans and sue tax strategies to ensure they continue to maximise the benefits of the new tax regime.
What are the changes to capital allowances?
The key change to capital allowances is a reduction in the main rate of the writing-down allowance (WDA) for plant and machinery from 18 per cent to 14 per cent per year.
While this does not eliminate tax relief on qualifying expenditure, it does reduce the speed at which businesses can write off their investments over time.
In addition, a new 40 per cent first-year allowance (FYA) has been introduced. This FYA applies to main rate expenditure on assets that fall outside the scope of existing first-year allowances, such as those purchased by unincorporated businesses or for leasing.
This is a significant change for farming businesses, especially where full expensing or the £1 million Annual Investment Allowance (AIA) may not always be available.
Who will be affected?
The changes will affect businesses that have pools of historic main rate expenditure, which pre-date the introduction of super-deduction or full expensing regimes.
While companies incorporated for Corporation Tax purposes will experience the most immediate impact, unincorporated businesses, such as sole traders or partnerships common in farming, will also be affected.
Farming contractors who often purchase machinery or equipment for leasing purposes may also benefit from the new FYA.
The measure is set to be implemented on:
- 1 April 2026 for businesses within the charge to Corporation Tax
- 6 April 2026 for businesses within the charge to Income Tax
Farming businesses and contractors that fall within these tax regimes will need to consider how these changes will affect their capital investment decisions and tax planning.
What does this mean for farming and rural businesses?
For farming and rural businesses that regularly invest in machinery, equipment, and infrastructure, the changes to the WDA and the introduction of the new FYA may alter the timing and approach to capital investment.
While the 14 per cent WDA still provides some relief, the reduced rate could result in higher tax liabilities in the long term.
This will be particularly relevant for farming families looking to pass down assets or invest in the future of their operations.
On the other hand, the 40 per cent FYA can be an attractive option for businesses that do not qualify for full expensing or AIA.
It will provide immediate tax relief on qualifying investments, such as new machinery, farm buildings, or infrastructure improvements, where the AIA or full expensing options are not available.
Benefits for farming contractors and leasing businesses
Farming contractors, who may purchase machinery for leasing purposes, stand to gain the most from the new FYA.
Previously, the leasing sector was excluded from many capital allowances benefits, but this measure aims to level the playing field by offering accelerated relief to businesses involved in leasing assets.
For example, a contractor leasing agricultural machinery to farms could benefit from immediate tax relief on new investments.
The introduction of this FYA also opens up opportunities for unincorporated businesses in the farming sector, who traditionally have not been able to benefit from full expensing.
This provides an incentive for rural entrepreneurs to invest in new plant and machinery, helping to modernise farming operations and increase productivity.
hat about second-hand assets?
Unfortunately, the new FYA does not apply to second-hand assets, which are common in the farming sector.
Many farming businesses rely on purchasing second-hand machinery, tractors or other farm equipment to reduce costs.
While the reduced WDA can still be applied to these assets, the exclusion from the FYA means that immediate relief cannot be claimed for second-hand purchases.
Additionally, cars, which may be used in farming businesses for transportation or utility purposes, are excluded from the scope of the new FYA.
This may affect farming businesses that regularly invest in vehicles for operations.
Seeking professional advice
As these changes could have a considerable impact on tax liabilities and capital investment decisions, it’s important for farming businesses to seek professional advice.
A tax adviser with experience in farming and rural businesses can help assess the impact of these changes and develop a strategy for maximising available capital allowances.