If you run a limited company, a partnership, or a sole trade and you buy equipment, machinery, or commercial vehicles, the Annual Investment Allowance (AIA) is one of the most valuable tax reliefs available. It lets you deduct the full cost of qualifying assets from your taxable profits in the year you buy them. No spreading the cost over several years. No complicated calculations. Just 100% relief, up to a set limit.
For the 2025/26 tax year, the AIA allowance remains at £1,000,000 per year. That limit has been in place since 1 January 2019 and is currently confirmed until 31 March 2026. After that date, the government could reduce it back to £200,000, though nothing has been announced yet. If you are planning significant capital expenditure, the window is open now.
How the AIA Allowance Works
The AIA allowance applies to most plant and machinery that a business buys for use in its trade. When you claim it, you reduce your taxable profits pound for pound. If your company buys a £50,000 piece of machinery and has £100,000 of taxable profit, the AIA brings that profit down to £50,000. You pay corporation tax on £50,000 instead of £100,000. At the 19% small profits rate, that saves you £9,500 in tax.
The relief is automatic in most cases. Your accountant will include it in your capital allowances calculation when preparing your corporation tax return (CT600). You do not need to apply to HMRC in advance. You just need to make sure the asset qualifies and that you have not exceeded the annual limit.
What Qualifies for the AIA
Most tangible capital assets used in your business qualify. The list includes:
- Machinery and industrial equipment
- Commercial vehicles (vans, lorries, pickup trucks)
- Office furniture and fixtures
- Computer hardware and servers
- Tools and specialist equipment
- Solar panels and energy-efficient installations
- Building fixtures such as heating systems, lifts, and air conditioning
Cars do not qualify for the AIA. Neither do buildings or structures (though the Structures and Buildings Allowance gives 3% relief per year instead). Assets bought purely for entertainment or that are not used in the trade also fall outside the AIA.
What Does Not Qualify
Some common purchases fall outside the AIA allowance entirely. These include:
- Passenger cars (unless they are pool cars or used exclusively for business)
- Land and buildings
- Ships and aircraft (separate rules apply)
- Assets gifted to the business or bought from a connected person
- Assets used partly for non-business purposes
If you buy a van for your plumbing business, that qualifies. If you buy a BMW for the director's personal use, it does not. The distinction matters when planning your capital expenditure.
The £1 Million Limit: How It Applies
The AIA allowance limit is £1,000,000 per 12-month accounting period. If your company has a shorter period, the limit reduces proportionally. A 6-month period gives you £500,000. A 9-month period gives you £750,000.
If your accounting period straddles 31 March 2026, you need to apportion the limit between the two periods. The portion before 1 April 2026 uses the £1m limit. The portion after uses whatever limit is in force at that time. If the limit drops to £200,000, you calculate a blended maximum. Your accountant will handle this, but it is worth knowing if you are planning a large purchase in early 2026.
Example: A Manchester Software Consultancy
Take a limited company in Manchester's Northern Quarter that turns over £420,000. The director buys £85,000 of new computer equipment and office fit-out in July 2025. The company's taxable profit for the year is £140,000.
The AIA allowance covers the full £85,000. The company deducts that from profit, leaving £55,000 taxable. Corporation tax at 19% gives a bill of £10,450. Without the AIA, the equipment would go into the main pool at 18% writing-down allowance, giving relief of just £15,300 in year one. The AIA saves the company over £13,000 in tax in the first year.
AIA vs Full Expensing
Since April 2023, limited companies can also use Full Expensing. This gives 100% relief on most main-rate plant and machinery, with no cap. It applies to new assets only. The AIA allowance covers both new and second-hand assets.
If you are a limited company buying new equipment, Full Expensing may be the better option because it has no £1m limit. But if you are buying second-hand, or if you are a sole trader or partnership, the AIA is your route to 100% relief. The two reliefs cannot be claimed on the same asset.
For most small and medium businesses, the AIA allowance is simpler and covers everything you need. Full Expensing is worth discussing with your accountant if you are planning a very large capital spend on new assets.
How to Claim the AIA on Your Tax Return
Claiming the AIA is straightforward. Your accountant will include the capital allowances computation in your corporation tax return (CT600) or your self assessment return (SA100 with SA103 if you are a sole trader). The key steps are:
- Identify all qualifying assets bought in the accounting period
- Calculate the total cost of those assets
- Apply the AIA allowance up to the £1m limit
- Any excess goes into the main pool for 18% writing-down allowance
- Enter the AIA claim amount on the capital allowances page of the return
If you use accounting software like Xero or FreeAgent, your bookkeeper can tag capital purchases. Your accountant then reviews the tags and prepares the claim. It is not something you need to file separately with HMRC.
Planning Your Capital Spend Around the AIA
If you know you will need to buy equipment in the next 18 months, there is a strong case for bringing purchases forward. The £1m AIA allowance is confirmed until 31 March 2026. After that, it could revert to £200,000. That is a difference of £800,000 in potential 100% relief.
For a business planning to spend £300,000 on machinery in 2026, the timing matters. If you buy before 1 April 2026, the full £300,000 qualifies. If you buy after, and the limit drops to £200,000, only £200,000 gets 100% relief. The remaining £100,000 goes into the main pool at 18% per year. The tax saving difference could be tens of thousands of pounds.
Speak to your accountant about your capital expenditure plans. If you are considering a large purchase, the current AIA allowance makes it very tax-efficient to act before the limit potentially changes.
Common Mistakes with the AIA Allowance
Three mistakes crop up regularly with the AIA allowance.
First, assuming cars qualify. They do not, unless they are vans or pool cars. If you buy a car for business use, you claim capital allowances through the main pool or special rate pool, not the AIA.
Second, forgetting the connected persons rule. If you buy an asset from your spouse or a company you control, the AIA is not available. The rules prevent relief on transactions between connected parties.
Third, missing the partial use restriction. If you use an asset 60% for business and 40% personally, the AIA only applies to the 60% business proportion. You must apportion the cost.
These are easy to get wrong if you prepare your own return. An ICAEW qualified accountant will catch them as part of the normal review process.
AIA and the Construction Industry
For construction businesses, the AIA allowance is particularly valuable. Plant, machinery, diggers, dumpers, scaffolding, and site equipment all qualify. If you are a contractor or a construction company registered under CIS, the AIA can significantly reduce your tax bill in a year of heavy equipment purchases.
Remember that the AIA applies to the accounting period in which the asset is brought into use, not when you pay for it. If you order a £100,000 excavator in March 2026 but it arrives and starts work in May 2026, the AIA claim falls in the later period. Timing matters.
Final Thoughts on the AIA Allowance
The AIA allowance is a straightforward, powerful relief. It rewards investment in your business by letting you write off the full cost of qualifying assets immediately. For the 2025/26 tax year, the £1m limit gives most businesses plenty of headroom.
If your business is planning capital expenditure, factor the AIA into your cash flow and tax planning. The relief is automatic, but the timing of purchases is within your control. A well-timed purchase before the limit potentially drops could save your business thousands in corporation tax.
For more guidance on capital allowances and corporation tax, speak to the team at Holloway Davies. Our ICAEW qualified accountants work with businesses across every sector, from trades and construction to tech and creative. We can help you structure your capital spend to maximise relief.