Changes to writing down allowances require split year calculation

Jacob Grattage, Reporter, Business & Accountancy Daily. Croner

HMRC clarifies how to calculate the main rate of writing down allowance after 4% cut if chargeable period straddles two financial years.

At the autumn Budget, the chancellor confirmed a cut in the main rate of writing down allowances (WDAs) from 18% to 14% effective on 1 April 2026 for corporation tax, and 6 April 2026 for income tax.

HMRC has clarified the process for reporting chargeable period as many companies will not be reporting to a 31 March year end in new guidance issued on 1 April as the new system came into force.

This is a significant tax raising measure and will affect at least 650,000 companies in year one. It is set to raise an estimated £1bn in year one of operation in 2026-27, rising to £1.5bn in year two.

It will affect all new and pooled expenditure on plant and machinery assets eligible for writing down allowances, and new expenditure eligible for the new first year allowance (FYA), excluding second-hand assets and cars. 

In the newly published guidance, HMRC stated: ‘You’ll need to work out a hybrid rate to use for that accounting period. Your hybrid rate is worked out based on what how much of your accounting period is before the rate changed, and how much is after.’

The hybrid rate will be based on the proportion of the chargeable period falling before and after the change date.

Budget changes to writing down allowance effected a tax base consisting of ‘the Budget costings stated.

How to calculate the chargeable amount

The calculation depends on what tax is paid, ie, corporation tax or income tax), the start date of the accounting period, and the end date of the accounting period.

1. Count the number of days in the whole accounting period.

2. Count the number of days from the first day of the accounting period to the day before the rate changed, including the first day. 

3. Divide the days before the rate changed by the total number of days.

4. Multiply the result by 18. 

5. Count the number of days from the day the rate changed to the end of the accounting period, including the day the rate changed.

6. Divide the days from when the rate changed by the total number of days. 

7. Multiply the result by 14.

8. Add the result from step four to the result from step seven. If the number has more than two decimal places, round up to two decimal places. This number is the hybrid rate.

Example

Company A pays corporation tax and has an accounting period beginning 1 January 2026 and ending 31 December 2026.

In the company’s accounting period, there are 365 total days, 90 days before 1 April 2026, and 275 days after 1 April 2026 (including 1 April 2026).

To work out their hybrid rate, the company should:

1. Divide 90 by 366, and multiply the result by 18.

2. Divide 275 by 365, and multiply the result by 14.

3. Add the two results together.

4. Round up to two decimal places.

Therefore, the hybrid rate is 14.99%.

At the Autum Budget, Derry Crowley, CEO at Xeinadin said: ‘The reduction in the writing down allowance limits businesses looking to invest in equipment in order to remain competitive. Removing £1.5bn in relief at a time when firms are already managing tight margins could make long term investment harder, not easier.