What is the AIA Capital Allowance?

The Annual Investment Allowance (AIA) gives you 100% tax relief on qualifying plant and machinery costs in the year you buy them. You deduct the full cost from your taxable profits before corporation tax is calculated. For the 2025/26 tax year, the AIA limit is £1,000,000. That means a limited company spending £80,000 on new machinery reduces its taxable profit by £80,000. At 19% corporation tax, that saves £15,200 in tax. At 25%, it saves £20,000. The AIA is not a loan or a grant. It is a capital allowance that reduces your tax bill. You do not spread the cost over several years. You claim it all in one go.

Who Can Claim the AIA?

Most businesses can claim the AIA capital allowance. This includes:
  • Limited companies
  • Sole traders
  • Partnerships (including LLPs)
There are some exclusions. You cannot claim AIA on cars (though you can claim other capital allowances on them). You also cannot claim on assets you owned before you started the business, or on assets given to you.

What Qualifies for the AIA?

The AIA covers most plant and machinery. HMRC defines plant and machinery broadly. It includes:
  • Office equipment: computers, desks, chairs, printers, servers
  • Tools and machinery: drills, lathes, diggers, forklifts
  • Fixtures: kitchen equipment in a café, shelving in a warehouse, air conditioning units
  • Vehicles: vans, lorries, tractors (but not cars)
  • Building alterations needed to install plant (but not the building itself)
A few specific items do not qualify. Cars are the main one. You claim writing down allowances on cars instead, at 6% or 18% per year depending on CO2 emissions. Land and buildings themselves do not qualify either, though integral features like lifts, heating systems, and electrical systems do.

Integral Features

Integral features are parts of a building that count as plant. These include:
  • Electrical and lighting systems
  • Cold water, hot water, and heating systems
  • Air conditioning and ventilation
  • Lifts, escalators, and moving walkways
  • External solar shading
If you refurbish a commercial property, the integral features often qualify for AIA. The building shell does not.

How the £1m Limit Works

The £1m AIA limit applies per group of companies, not per company. If you have two companies under common control, they share one £1m limit between them. You can split it however you like, but the total across the group cannot exceed £1m. The limit applies to your accounting period. If your accounting period is shorter than 12 months, the limit reduces proportionally. A 6-month period gives you £500,000. If you spend more than £1m in a year, the excess goes into the main pool and attracts writing down allowances at 18% per year. You still get relief, just not all in one year.

Example: Spending £1.2m

A Manchester-based software consultancy spends £1.2m on new servers and office fit-out. The first £1m qualifies for AIA, giving 100% relief. The remaining £200,000 goes into the main pool. At 18% writing down allowance, that gives £36,000 relief in year one. The balance carries forward.

How to Claim the AIA

You claim the AIA capital allowance on your corporation tax return (CT600). You enter the qualifying expenditure and the AIA claimed in the capital allowances section. For sole traders and partnerships, you claim on your self assessment return (SA100 or SA800). The capital allowances section is on the self-employment pages (SA103). You do not need to submit a separate form. Just include the figures in your tax return. Keep records of what you bought, when, and how much it cost. HMRC may ask for evidence.

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. There is no £1m limit. Full Expensing is available to limited companies only. Sole traders and partnerships cannot use it. They rely on the AIA instead. For limited companies spending over £1m, Full Expensing is often better. For spending under £1m, the AIA gives the same result. The choice matters most for very large capital investments.

AIA and Cars

Cars do not qualify for the AIA. You claim capital allowances on cars through the main pool or special rate pool, depending on CO2 emissions.
  • Cars with CO2 emissions up to 50g/km: 100% first year allowance (if new and zero-emission)
  • Cars with CO2 emissions 51-130g/km: 18% writing down allowance
  • Cars with CO2 emissions over 130g/km: 6% writing down allowance
If you buy a van or a lorry, those do qualify for AIA. Only cars are excluded.

AIA and Second-Hand Assets

You can claim AIA on second-hand plant and machinery. The same rules apply. You get 100% relief on the purchase price, up to the £1m limit. This is useful for businesses buying used equipment. A joinery workshop in Leeds buying a second-hand CNC router for £45,000 can claim AIA on the full amount.

AIA and Hire Purchase

If you buy assets on hire purchase, you claim AIA on the cash price, not the total HP cost including interest. The interest element is a separate revenue expense. You claim the AIA in the year you take ownership of the asset, not when you make the payments. For HP agreements, that is usually when you sign the agreement and take delivery.

AIA and Disposals

When you sell an asset on which you claimed AIA, you need to account for the disposal. The sale proceeds reduce your capital allowances pool. If you sold the asset for more than its tax written down value, you may have a balancing charge (effectively a clawback of the relief). In practice, because AIA gives 100% relief, the tax written down value is usually zero. The full sale proceeds go into the pool as a disposal value. This reduces future capital allowances.

Planning Your AIA Claim

Timing matters. If you are close to the £1m limit, consider deferring some purchases to the next accounting period. That keeps you within the limit and avoids the slower writing down allowance route. If your profits are low, you might prefer not to claim AIA. You can disclaim the allowance and carry the cost forward. This is useful if you have losses that would be wasted, or if you expect higher profits next year. As ICAEW qualified accountants, we often advise clients on the timing of capital purchases. A conversation with our team can help you plan the most tax-efficient approach.

Common Mistakes

  • Claiming AIA on cars. You cannot. Use writing down allowances instead.
  • Forgetting to claim on second-hand assets. They qualify just like new ones.
  • Not keeping records. HMRC can ask for evidence of what you bought and when.
  • Assuming the £1m limit applies per company in a group. It does not. It applies per group.
  • Claiming on the building itself. Only plant and machinery qualifies, not the structure.

Need Help With Your AIA Claim?

The AIA capital allowance is straightforward for most purchases, but the rules have traps. Group limits, integral features, and the interaction with Full Expensing all need careful handling. If you are planning a significant capital investment, get in touch with our team. We can review your planned purchases, calculate the most efficient timing, and ensure your claim is correct on your tax return. You can also use our capital allowances calculator to estimate your relief.