Annual Investment Allowance

The Annual Investment Allowance (AIA) is one of the most valuable capital allowances available to UK businesses. It provides 100% tax relief on the cost of most plant and machinery (excluding cars) up to an annual limit of £1 million. This means that if you spend £100,000 on new equipment for your business, the full £100,000 can be deducted from your taxable profits in the same chargeable period. The AIA has been set at £1 million since 1 January 2019 and has been extended to 31 March 2026 at the time of writing. After that date, it is scheduled to revert to £200,000 — though this has been extended previously and may be changed again.

What Qualifies for AIA

To qualify for the AIA, the expenditure must be on plant and machinery used for business purposes. This includes most tangible capital assets: computers and IT equipment, office furniture and fittings, machinery and industrial equipment, commercial vehicles (but not cars), tools and fixtures, and certain building-integrated features such as air conditioning, lighting, and alarm systems. The asset must be purchased new or second-hand, but it must be brought into use for the business in the same chargeable period as the expenditure is incurred. Hire purchase and finance lease assets can qualify, but the relief is based on the capital cost, not the rental payments. If the asset is sold or disposed of before being brought into use, the AIA claim must be withdrawn.

Exclusions

The following assets do not qualify for AIA: cars (although vans, lorries, and motorcycles do qualify), assets acquired before the business started trading, assets received as a gift or by way of a capital contribution, assets used partly for non-business purposes (these go into the single asset pool instead), expenditure on the provision of a dwelling (residential property), and expenditure on assets held for the purposes of a commercial letting of furnished holiday cottages. Land and buildings as such do not qualify, although integral features within a building do. If you acquire a second-hand asset that has previously been used by a connected party, the AIA may be restricted to the lower of cost and market value.

Time Limits and Chargeable Periods

The AIA is calculated per chargeable period — usually your accounting year. If your accounting period is shorter than 12 months, the AIA limit is proportionally reduced. For example, a six-month accounting period would have an AIA limit of £500,000 (6/12 × £1 million). If your accounting period spans 31 March 2026 (when the £1 million limit is scheduled to end), you must apportion the expenditure between the two periods and apply the different AIA limits accordingly. Similarly, if you have multiple associated companies or connected partnerships, the £1 million limit is divided by the number of associated entities. For groups of companies, this means the total AIA across the group is capped at £1 million, not £1 million per company.

Interaction with Other Allowances

The AIA is claimed before other capital allowances such as writing down allowances (WDA) and first-year allowances (FYA). If your plant and machinery expenditure exceeds the AIA limit, the excess is allocated to the appropriate pool (main rate pool at 18% or special rate pool at 6%) and written down over subsequent years. You can choose which assets to allocate to the AIA and which to leave in the pool — this can be useful if some assets qualify for a lower rate or if you want to preserve the AIA for future periods. The AIA cannot be claimed on assets that already qualify for 100% first-year allowances, such as electric vehicle charge points or energy-efficient technologies. In those cases, the FYA is usually more beneficial because it does not count towards the AIA limit.

Claiming AIA on Your Tax Return

The AIA is claimed on your tax return — the CT600 for companies or the Self Assessment return for sole traders and partnerships. You must include a capital allowances computation showing the AIA claimed, the pool balance after the claim, and the other allowances due. The claim must be made within 12 months of the filing date for the return. If you miss the deadline, you can amend the return to include the claim within that period. If you over-claim AIA (for example, by including ineligible expenditure), HMRC can recover the excess tax relief plus interest. If you under-claim, you may be able to carry forward the unrelieved expenditure or claim it in a later period, subject to the relevant time limits.

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