What Is the Annual Investment Allowance?

The Annual Investment Allowance (AIA) is a capital allowance that gives you 100% tax relief on qualifying plant and machinery purchases in the year you buy them. If you spend £50,000 on a new excavator, you deduct the full £50,000 from your taxable profits in that accounting period. No spreading the cost over several years. The current AIA limit is £1,000,000 per year. That applies to most businesses: limited companies, sole traders, and partnerships. The £1m limit was made permanent in the Spring Budget 2021 and remains in place for the 2025/26 tax year.

Who Can Claim AIA?

Most UK businesses can claim AIA. You do not need to be a limited company. Sole traders and partnerships qualify too, provided the business is trading and makes a profit (or would have made a profit without the capital allowance claim). There are a few exclusions. Partnerships where all partners are individuals (not companies) can claim. But partnerships with a corporate partner cannot. Also, businesses buying cars cannot claim AIA on them. Cars have their own capital allowance rules (more on that below).

What Qualifies for AIA?

The AIA covers most plant and machinery. HMRC defines plant and machinery broadly. It includes:
  • Office equipment: desks, chairs, computers, printers, servers
  • Tools and machinery: drills, lathes, industrial ovens, printing presses
  • Commercial vehicles: vans, lorries, tractors (but not cars)
  • Fixtures: kitchen equipment in a café, shelving in a warehouse, air conditioning units
  • Building alterations needed to install plant (but not the building itself)
A few specific examples from real client situations:
  • A Manchester-based joinery workshop bought a CNC router for £38,000. Full AIA claim in year one.
  • A Bristol café spent £22,000 on a commercial espresso machine and refrigeration units. All covered.
  • A Leeds IT consultancy bought £14,000 of laptops and monitors for staff. Claimed in full.

What Does NOT Qualify?

Some assets are specifically excluded from AIA:
  • Cars (passenger vehicles). These go through the main pool or special rate pool at 18% or 6% writing down allowances.
  • Assets you already owned before the business started (no double-dipping).
  • Buildings and structures (the fabric of the building itself).
  • Land and buildings used partly for non-business purposes.
  • Assets given to you as a gift (you can only claim on what you paid).
  • Assets used partly for non-business purposes (apportionment required).

The £1m Limit: How It Works

The £1m AIA limit applies per group of companies, not per company. If you have two limited companies under common control, they share one £1m allowance between them. HMRC calls these "associated companies". You must apportion the allowance between them. For a sole trader or a single limited company, the full £1m is available each year. The limit applies to your accounting period. If your year-end is 31 December 2025, you have £1m of AIA for the period 1 January 2025 to 31 December 2025. If your accounting period is shorter than 12 months, the limit reduces proportionally. A 6-month period gives you £500,000.

AIA and Full Expensing: What's the Difference?

Full Expensing is a separate relief introduced in April 2023 for limited companies only. It gives 100% relief on most main-rate plant and machinery (same as AIA) but with no cap. It also gives 50% relief on special-rate assets (integral features, long-life assets). AIA is available to all businesses. Full Expensing is limited companies only. For most small and medium limited companies, AIA covers everything you need. The £1m limit is generous. Only if you spend over £1m in a year does Full Expensing become relevant. In that case, you claim AIA on the first £1m and Full Expensing on the balance. Sole traders and partnerships cannot use Full Expensing. They rely on AIA plus standard writing down allowances for anything above the £1m cap.

How to Claim AIA

Claiming AIA is straightforward. You include the capital allowance claim in your tax return. For a limited company, you enter the claim on the corporation tax return (CT600). The capital allowances section is part of the standard computation. Your accountant will prepare this. For a sole trader, you claim on the self-employment pages of your self assessment (SA103). There is a specific box for capital allowances. You do not need to submit a separate form to HMRC. But you must keep records of what you bought, when, and how much you paid. HMRC can ask for evidence if they open a compliance check.

Timing Matters

You claim AIA in the accounting period when the expenditure is incurred. For most purchases, that is when you receive the asset (or when you pay, depending on the contract terms). Hire purchase and finance lease agreements have their own rules. Generally, you claim when you bring the asset into use. If you buy an asset in March 2025 but do not start using it until April 2025, the claim goes in the period ending March 2025 (the period of purchase, not use). HMRC's guidance says the expenditure is incurred when you become the owner of the asset or when you pay, whichever is earlier.

AIA and Cars: The Exception

Cars are excluded from AIA. They have their own capital allowance treatment. New zero-emission cars (electric) qualify for 100% first-year allowances. That is effectively the same as AIA but specific to electric cars. Used electric cars go into the main pool at 18% writing down allowance. Petrol and diesel cars go into the main pool (18% WDA) or special rate pool (6% WDA) depending on CO2 emissions. Cars with CO2 emissions over 50g/km go into the main pool. Cars over 110g/km (pre-2021 rules) go into special rate pool. The rules changed in April 2021. Your accountant will calculate the correct pool. If you buy a van, that qualifies for AIA. Vans are plant and machinery. A Ford Transit Custom at £35,000? Full AIA claim.

AIA and Second-Hand Assets

Second-hand assets qualify for AIA just like new ones. The same rules apply. You claim 100% relief on the purchase price. There is one catch. If you buy a second-hand asset that was previously used by a connected person (a relative, a company you control), the AIA claim may be restricted. HMRC wants to prevent abuse where assets are sold between connected parties purely to generate capital allowances. For arm's-length purchases from an unconnected seller, no restriction applies.

AIA and Partial Business Use

If you use an asset partly for business and partly for private purposes, you apportion the AIA claim. Only the business-use proportion qualifies. Example: A sole trader buys a laptop for £2,000. They use it 70% for business and 30% for personal use. The AIA claim is £1,400 (70% of £2,000). The private-use element is not deductible. This applies to assets like phones, tablets, and home office equipment. HMRC expects a reasonable basis for the apportionment. Keep a log if needed.

AIA and Disposals

When you sell an asset on which you claimed AIA, you must account for the disposal. The proceeds reduce your capital allowance pool. If you sell for more than the tax-written-down value, you get a balancing charge (taxable income). If you sell for less, you get a balancing allowance. This is standard capital allowance treatment. Your accountant will handle it in the computation.

Common Mistakes

A few errors we see regularly:
  • Claiming AIA on buildings. The fabric of a building is not plant. Only fixtures and fittings inside it qualify.
  • Forgetting to claim. Many business owners simply deduct the full cost as a revenue expense. That is wrong. Capital expenditure must go through the capital allowance regime.
  • Not apportioning for associated companies. If you have two companies, you cannot both claim £1m. You share it.
  • Claiming on cars. Cars are excluded. Use the correct pool rates instead.
  • Missing the deadline. You can amend a corporation tax return within 12 months of the filing date. If you forgot to claim, amend it.

Should You Claim AIA or Not?

In most cases, claiming AIA is the right move. 100% relief in year one is better than spreading relief over several years. Cash flow benefits are immediate. But there are edge cases where you might choose not to claim. If you are making a loss and cannot use the relief immediately, you might prefer to defer the claim to a later year when you have profits to offset. You can disclaim AIA and let the asset go into the main pool at 18% WDA instead. This is a planning decision. Talk to your accountant about the timing.

How Holloway Davies Can Help

We are ICAEW qualified accountants working with UK businesses across every sector. If you are buying plant and machinery and want to maximise your tax relief, we can help you structure the claim correctly. We handle capital allowance computations for limited companies, sole traders, and partnerships. We also advise on the interaction between AIA, Full Expensing, and other capital allowance regimes. If you are unsure whether an asset qualifies, or how to apportion the £1m limit across associated companies, get in touch. We can review your planned purchases and tell you exactly what relief you are entitled to. View our full range of services or contact us directly to discuss your situation. For more background on corporation tax and capital allowances, visit our fundamentals page.