Energy generators, broadband providers, and other major investors in infrastructure and manufacturing will face higher upfront tax costs due to a reduction in tax relief rates, a change expected to generate billions in government revenue over the next six years. Beginning in April, the main rate for writing down allowances—tax relief that allows companies to deduct capital investments in machinery and physical assets against taxable profits—will be lowered from 14 percent to 12 percent. This follows an earlier cut from 18 percent to 14 percent earlier this year.

Writing down allowances help companies spread tax deductions over multiple years, thereby reducing their corporation tax bills gradually. The reduction in the allowance rate means that companies will now write off investments more slowly, potentially impacting cashflow management for capital-intensive businesses. Experts predict that while businesses will eventually receive the same total tax relief, the delayed schedule could create short-term financial pressures.

Matthew Greene, a partner at PwC UK, noted that the decrease in allowances “can translate into a meaningful year-on-year cash tax cost” for companies with large pools of unclaimed capital expenditure. Similarly, Matt Bell, capital allowances director at MHA, estimated that the rate of tax relief on investments has been effectively cut by one-third over the past two years. He emphasized that the slowed relief “will be particularly significant for companies with substantial pools of unclaimed allowances.”

To partially offset the impact, the government has increased the main rate for the first-year allowance—the percentage of investment costs that can be claimed as tax relief immediately—from 40 percent to 50 percent for investments made from January. The Treasury stated this adjustment aims to “maintain stability for businesses” and support “the UK’s international competitiveness.” This change is expected to raise £125 million in revenue this year, eventually increasing to £1.1 billion annually by 2032.

Fhaheen Khan, senior economist at Make UK, representing the manufacturing sector, said the higher first-year allowance might encourage new investment by providing upfront tax relief. However, Khan cautioned that reductions in writing down allowances could undermine these benefits for manufacturers with existing investment plans. “Slower relief could put pressure on cashflow and make longer-term projects less attractive,” Khan said, urging the government to maintain a “stable, predictable tax environment” conducive to sustained investment.

Rob Williams, a partner at WTS UK, suggested the changes will have minimal effect on new investments but will raise the corporation tax burden for companies that made significant investments before the introduction of the full expensing regime. Full expensing, initially introduced temporarily between April 2023 and March 2024 and since retained, allows immediate write-offs of qualifying investments in the year of purchase.

The headline corporation tax rate remains at 25 percent, the lowest among G7 economies, providing an additional competitive incentive for UK businesses despite the adjustments to capital allowances. Overall, these tax changes are projected to raise approximately £5.2 billion by 2032, marking one of the largest revenue-generating measures in the current budget.