Autumn Budget 2026: tax changes for engineering firms

Autumn Budget 2026: tax changes for engineering firms

Chancellor John Healey delivered the Autumn Budget on 28 October 2026. For engineering and manufacturing businesses it brings a higher first-year allowance, simpler R&D claims, electricity cost relief for eligible manufacturers and new export finance support. It also brings a lower writing-down allowance, a higher National Living Wage and a halving of the Business Asset Disposal Relief (BADR) lifetime limit.

The benefits are uneven. A manufacturer investing in qualifying equipment and eligible for electricity relief is likely to come out ahead. A design consultancy with little capital expenditure and rising payroll costs may see far less. Most measures below are subject to legislation in Finance Bill 2026-27, so the details may change.

We look at the announcements most relevant to engineering businesses in Liverpool, Manchester, Cheshire and the wider North West, and the financial decisions they may influence.

Key dates for engineering businesses

Date	What happens
11 November 2026 to 3 February 2027	Application window for new import tariff suspensions
30 November 2026	British Industrial Competitiveness Scheme (BICS) application deadline; Founders’ Relief technical consultation closes
1 January 2027	First-year allowance rises from 40% to 50%
1 April 2027	Writing-down allowance falls from 14% to 12%; R&D claim notification form removed; National Living Wage rises to £13.21; BICS exemption from Renewables Obligation and Feed-in Tariff costs begins
6 April 2027	BADR lifetime limit falls to £500,000; Founders’ Relief begins
October 2027	BICS exemption from Capacity Market costs begins

Capital allowances: a 50% first-year allowance, but a lower writing-down allowance

Investment in machinery, equipment and automation is essential for engineering businesses looking to increase capacity, improve productivity and stay competitive. The Budget 2026 document makes two changes to capital allowances.

For qualifying expenditure incurred on or after 1 January 2027, the main-rate first-year allowance rises from 40% to 50%. Half the cost of eligible plant and machinery can be deducted from taxable profits in the year of investment, and the balance is relieved through writing-down allowances.

From April 2027, however, the main-rate writing-down allowance falls from 14% to 12%, following the cut from 18% to 14% in April 2026. Businesses relying on the main pool will recover expenditure more slowly, which may increase tax liabilities in the earlier years.

The practical effect depends on who is investing:

• Companies can already claim 100% full expensing on eligible new plant and machinery, which the Chancellor confirmed will remain. The £1 million Annual Investment Allowance also continues. For these businesses the higher first-year allowance adds little.
• Sole traders and partnerships cannot claim full expensing, so the 50% first-year allowance is more relevant to them.
• Expenditure outside full expensing, and businesses with large existing main-pool balances, are most exposed to the lower writing-down allowance and should revisit their cash-flow forecasts.

What should engineering businesses consider?

Businesses planning to buy CNC machinery, production equipment, automated systems or other capital assets should review the timing and nature of the expenditure alongside their tax position. For firms expanding in the North West, location can also affect the reliefs available. Our article on Liverpool Freeport tax benefits and investment incentives explains how qualifying businesses may benefit from enhanced allowances.

Tax relief should support an investment decision, not drive it. The expected gains in productivity, capacity and profitability should come first.

R&D tax relief: fewer forms for innovative engineering firms

Engineering businesses often work through technical uncertainty, whether developing products, improving manufacturing processes or solving complex design problems. Where a project seeks an advance in science or technology and meets HMRC’s conditions, R&D tax relief may be available.

Qualifying R&D is not confined to laboratories. As our structural engineering R&D case study shows, engineering practices can carry out qualifying innovation while solving technical problems for clients.

The Budget simplifies the claims process in two ways:

• For claims made on or after 1 April 2027, the separate R&D claim notification form is removed.

• The Additional Information Form will be simplified from autumn 2027.

These changes should reduce administration, particularly for businesses making a first claim or returning to the regime. Eligibility is unchanged. Routine product development, standard engineering design and improvements without a technological advance will not qualify. Businesses must still evidence the uncertainties they set out to resolve, the work done and the qualifying expenditure.

What should engineering businesses consider?

Review current and recent development projects, including work done under customer contracts, and keep good project records as the work happens. Our article on the warning signs that R&D claims are being missed is a useful checklist.

Are engineering firms eligible for BICS electricity relief?

Energy costs remain a significant concern for manufacturers. The British Industrial Competitiveness Scheme (BICS) is designed to cut electricity costs for eligible manufacturers, and the Chancellor said it will take 25% off electricity bills for 10,000 firms. The application window closes at 11:59pm on 30 November 2026, and manufacturers who miss it will not receive support from April 2027.

Eligible businesses receive exemptions from the indirect costs of three schemes. The Renewables Obligation and Feed-in Tariff exemptions begin in April 2027, and the Capacity Market exemption begins in October 2027. Government figures put the saving at up to 25% of electricity bills. An additional payment in 2027 will reflect the support businesses would have received had BICS been in place from April 2026.

The scheme is targeted, and the official guidance sets four tests. A business must:

1. be registered at Companies House;

2. have at least one eligible SIC code registered (up to four can be listed);

3. manufacture an eligible product in Great Britain, identified by its commodity (HS) code; and

4. use at least 33 MWh of grid electricity a year at the manufacturing site.

The relief is calculated site by site. Where a site makes both eligible and ineligible products, it is pro-rated: 0% relief if 25% or less of its electricity supports eligible production, 50% relief between 25% and 50%, and 100% at 50% or above. Only grid electricity counts, so on-site solar or combined heat and power generation is excluded. Exemptions run for five years, subject to annual declarations.

Engineering businesses that manufacture may qualify, depending on their activities. Design consultancies, professional engineering practices and other businesses outside the eligible sectors should not assume they will benefit. The government’s eligibility checker gives an initial indication.

What should engineering businesses consider?

Manufacturers should check their SIC and commodity codes now, gather six months of electricity bills and apply before the deadline. Applications cannot be amended once submitted. Savings should only be built into forecasts where eligibility is established. Businesses outside the scheme will need to focus on energy efficiency, equipment upgrades and commercial energy procurement.

Employment costs and skills: continuing pressure

The National Living Wage rises by 3.9% to £13.21 an hour from 1 April 2027. Many qualified engineers earn well above the statutory rate, but the increase affects production operatives, apprentices and other grades, and may create pressure to maintain pay differentials with skilled staff. For businesses with narrow margins and fixed-price contracts, the extra cost can be difficult to absorb.

The Chancellor also announced that the government will legislate so that non-compete clauses cannot prevent start-ups and scaling firms from hiring, with detail on wider restrictive practices expected in early 2027. The reform could make it easier for growing engineering businesses to recruit experienced staff. It could equally make it harder to retain specialists and protect commercially sensitive information. The effect will depend on the final legislation.

What should engineering businesses consider?

Update 2027 workforce budgets, consider the effect of the increase across pay grades, and check that long-term contract pricing reflects future employment costs. For firms struggling to recruit, workforce planning, training and succession remain priorities.

Defence, aerospace and advanced manufacturing: supply chain opportunities

The Chancellor announced that Rolls-Royce will develop its next generation of turbine engine technology in the UK in partnership with the government, a £2.5 billion investment that the government says will support jobs across the Midlands, Bristol and the UK. Support for strategic industries is also channelled through the British Business Bank and the National Wealth Fund.

For engineering firms in precision manufacturing, aerospace, defence, specialist components or advanced materials, programmes like this can create supply chain opportunities. The same is true in automotive, where electrification continues to drive investment. We cover the tax considerations in our article on R&D in the automotive sector.

Government investment in a major programme does not automatically become contracts for smaller suppliers. Businesses may need to show technical capability, quality assurance, financial resilience and production capacity.

What should engineering businesses consider?

Assess readiness for larger and more demanding contracts. Equipment, accreditation, skilled staff and working capital may all be needed before revenue arrives, so financial planning will determine whether an opportunity is commercially viable.

Export finance: wider access for engineering exporters

The Budget widens access to finance for exporters. UK Export Finance (UKEF) will extend its General Export Facility, a working capital guarantee, to include new exporters, and will make it quicker for lenders to access guarantees of up to £15 million. A new UKEF guarantee delivered with the British Business Bank, aimed at SME exporters and smaller loans, is due to launch in 2027.

International contracts often involve substantial upfront spending on materials, production and labour, with payment only on delivery or completion. That can strain working capital even on a profitable order. Better access to finance may help qualifying firms take on larger contracts, but it remains subject to eligibility and lender assessment, and additional borrowing must be supported by future cash flow.

What should engineering businesses consider?

Assess working capital needs before committing to large orders, and weigh export finance alongside customer payment terms, currency exposure, production costs and overall profitability.

Import tariffs: suspensions extended and a new application window

The government is extending business tariff suspensions on 269 goods that were due to expire at the end of 2026. The Budget document names chemicals, plastics, hydrogen, automotive, and food and drinks among the sectors covered. Suspensions due to expire in December 2026 now run to 31 December 2028, and those due in June 2027 run to 31 December 2027.

Businesses can apply for new suspensions between 11 November 2026 and 3 February 2027, and the same window allows views on the roughly 90 suspensions due to expire in 2027. Full details are on the duty suspensions page.

Savings depend on the precise classification of the goods imported, so firms should not assume every material in a sector benefits.

What should engineering businesses consider?

Importers of specialist materials, components or industrial inputs should check their commodity codes against existing and proposed suspensions. Where volumes are large, even a modest tariff reduction can improve margins.

Selling an engineering business: BADR falls to £500,000

From 6 April 2027, the BADR lifetime limit falls from £1 million to £500,000. BADR currently allows qualifying individuals to pay Capital Gains Tax (CGT) at 18% on eligible gains, up to the lifetime limit. The Chancellor said the change means no difference for three in four claimants, but owners with larger gains will feel it.

For an owner with unused BADR entitlement making a qualifying disposal that produces a £1 million gain, the change could add £30,000 to the CGT bill, assuming the balance is taxed at the 24% higher rate.

The Budget also proposes transitional provisions for contracts, and certain share reorganisations, that are entered into before 6 April 2027 but not completed until after it. The detail will be set out in the legislation, and the anti-forestalling rules that applied when the BADR rate rose in April 2026 show that exchanging contracts early does not automatically secure the old treatment. Some owners with gains above £500,000 may consider bringing a disposal forward to complete before 6 April 2027. The timing has to make commercial sense first, and owners should take advice on how the transitional rules apply to their deal.

The Budget also announces a new Founders’ Relief from 6 April 2027: a 10% CGT rate on up to £10 million of lifetime gains for qualifying founders and significant early investors in high-growth, innovative UK companies. The £10 million allowance is reduced by amounts already claimed under BADR and investors’ relief. The conditions below are proposed, and the technical consultation closes on 30 November 2026.

As proposed, a founder would need to meet all of these conditions, and the company would also need to pass two of three growth or innovation tests:

• Hold at least 25% of the ordinary shares, with matching voting and economic rights, from when the company’s trade began, and keep them for at least five years before the sale.
• Be UK resident for the five consecutive tax years before the sale.
• Be selling shares in a company with turnover of at least £10 million and at least 15 qualifying full-time employees in the accounting period before the sale.

Pass two of three tests: average compound turnover growth of 25% a year across three consecutive accounting periods within the ten years before the sale, starting from at least £10 million; the same rate of growth in full-time employees, starting from at least 15; or at least £1.5 million of qualifying R&D expenditure with relief claimed in the three years before the sale.

Compound growth of 25% a year over three years roughly doubles a business, so the relief is aimed at scale-ups, not established firms growing steadily. Engineering businesses with substantial R&D claims may find the R&D test relevant. The conditions may change after consultation.

For some founders, Founders’ Relief could open a more favourable exit. For others, the smaller BADR limit makes a sale more expensive. We cover both in our article on BADR and Founders’ Relief after the Autumn Budget. As we explored in Engineering’s exit problem: why the next generation isn’t buying, many owners already struggle to find a successor or buyer, and the tax changes add another layer to a complex decision.

What should engineering business owners consider?

The timing and structure of a sale should be reviewed well before any transaction, ideally with advice on BADR, the proposed Founders’ Relief and how the transitional rules apply to contracts exchanged before 6 April 2027 but completed after it.

What should engineering businesses do following the Budget?

The priority is to understand how the announcements affect your own position, not to assume that measures aimed at industry will help every engineering business. Worth reviewing:

• Capital investment: are planned purchases timed and structured to use the available allowances?
• Energy: if you manufacture, do you meet the BICS tests, and will you apply by 30 November 2026?
• Innovation: could current or recent development projects qualify for R&D tax relief?
• Operating costs: how will wage increases, energy support and import duties affect profitability?
• Growth and funding: could export finance or industrial investment programmes support expansion?
• Succession: how might the BADR and Founders’ Relief changes affect the timing and structure of a sale?

For businesses considering major investment, expansion or succession, these decisions work best as part of a wider financial strategy.

Planning for investment, growth or succession?

At UHY Williamson Croft, we work with engineering and manufacturing businesses across Liverpool, Manchester and the wider North West, providing specialist tax advice, financial planning and support with investment, growth and succession.

Whether you are considering new machinery, exploring R&D tax relief, checking BICS eligibility or planning the future of your business, our team can help you understand the Budget’s financial implications. Contact Damien Loughran below to discuss our accountancy and advisory services for manufacturing businesses.

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