Annual Investment Allowance 2025/26: A Complete Guide for UK Businesses

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 costs in the year you buy them. If you spend £100,000 on a new piece of equipment, you can deduct the full £100,000 from your taxable profits in that accounting period. No spreading the cost over several years. No complicated calculations.

For the 2025/26 tax year, the AIA limit is permanently set at £1,000,000. That is a significant figure for most UK businesses. A sole trader in Manchester buying a new van for £35,000 gets the full deduction in year one. A limited company in Birmingham spending £400,000 on manufacturing equipment does the same.

The AIA applies to most businesses: limited companies, sole traders, and partnerships. The key condition is that you are carrying on a qualifying trade or property business. If you are, and you buy qualifying plant and machinery, the AIA is your primary route to capital allowances relief.

How Much Can You Claim Under the AIA?

The AIA limit is £1,000,000 per year. This figure has been in place since 1 January 2019 and is now permanent. It was temporarily increased from £200,000 during the 2014 Autumn Statement and later made permanent in the 2020 Budget.

Here is how the £1m limit works in practice:

• You can claim 100% relief on qualifying expenditure up to £1m per 12-month accounting period.
• If your accounting period is shorter than 12 months, the limit is proportionally reduced. A 6-month period gives you a £500,000 limit.
• If you buy assets that cost more than £1m, the excess goes into the main pool and attracts writing down allowances at 18% per year (or 6% for special rate assets).

Example: A software consultancy in Shoreditch buys new servers and office equipment costing £180,000 in the 2025/26 tax year. The full £180,000 qualifies for AIA. The company deducts the entire amount from its taxable profits, saving corporation tax at 19% or 25% depending on profit level. At 25% corporation tax, that is a £45,000 tax saving in year one.

What Qualifies for the Annual Investment Allowance?

The AIA covers most plant and machinery. HMRC defines plant and machinery broadly, but the common categories include:

• Commercial vehicles: vans, lorries, tractors, diggers.
• Office equipment: computers, servers, printers, furniture.
• Manufacturing and trade equipment: machinery, tools, production line assets.
• Fixtures: kitchen fittings in a café, shelving in a retail shop, air conditioning units.
• Building alterations needed to install plant and machinery (but not the building itself).

For a limited company, the AIA also covers certain integral features: lifts, escalators, heating and cooling systems, electrical systems, and water systems. These are special rate assets and qualify for AIA at the same 100% rate, but any expenditure above the AIA limit goes into the special rate pool at 6% writing down allowance.

A Bristol-based café owner spending £25,000 on a commercial kitchen, £8,000 on seating and tables, and £4,000 on a till system can claim AIA on all of it. Total qualifying spend: £37,000. Full deduction in year one.

What Does NOT Qualify for AIA?

Several categories are explicitly excluded from the AIA:

• Cars. Passenger cars do not qualify for AIA. They attract capital allowances through the main pool or special rate pool depending on CO2 emissions.
• Land and buildings. The cost of buying or constructing a building does not qualify. Structures and Buildings Allowance (SBA) gives 3% relief per year instead.
• Assets used partly for non-business purposes. If you use a van 60% for business and 40% for personal use, only the business proportion qualifies.
• Assets given to the business by a connected person. You cannot claim AIA on an asset you already owned personally and then introduced into the business.
• Assets acquired before the business started trading. You cannot claim AIA on assets bought before you began trading.

How to Claim the Annual Investment Allowance

Claiming AIA is straightforward. You include the qualifying expenditure in your capital allowances computation as part of your tax return.

For a limited company, you claim on the corporation tax return (CT600). For a sole trader or partnership, you claim on the self-assessment return (SA100 or SA800).

You do not need to submit a separate form. You simply calculate the total qualifying expenditure, apply the AIA up to the £1m limit, and deduct the resulting figure from your taxable profits.

If you use accounting software like Xero, FreeAgent, or QuickBooks, your accountant can prepare the capital allowances schedule as part of your year-end accounts. Most accountants will ask you for a list of asset purchases during the year and then calculate the AIA claim.

Our ICAEW qualified team at Holloway Davies handles AIA claims as part of our standard corporation tax and self-assessment services. We review your asset purchases, identify qualifying items, and ensure you claim the maximum relief available.

AIA and the Corporation Tax Rates

The AIA interacts with the corporation tax rates in a straightforward way. You deduct the AIA from your taxable profits before applying the corporation tax rate.

For the 2025/26 tax year, the rates are:

• 19% on profits up to £50,000 (small profits rate).
• 25% on profits above £250,000 (main rate).
• Marginal relief applies between £50,000 and £250,000.

If your company has profits of £300,000 and spends £100,000 on qualifying plant and machinery, the AIA reduces your taxable profits to £200,000. You then pay corporation tax at the marginal rate between £50,000 and £250,000, not the full 25% main rate.

The AIA is particularly valuable for companies paying the 25% rate. Every £1,000 of AIA saves £250 in corporation tax. For a company at the 19% rate, the saving is £190 per £1,000.

AIA and Full Expensing: What Is the Difference?

Full Expensing is a separate capital allowance introduced in April 2023. It gives 100% relief on qualifying main rate plant and machinery for limited companies only. Sole traders and partnerships cannot use Full Expensing.

The key difference is that Full Expensing has no monetary limit. You can claim 100% relief on unlimited qualifying expenditure. The AIA has a £1m limit.

In practice, most businesses use the AIA first because it covers both main rate and special rate assets. Full Expensing only covers main rate assets. If you spend £1.2m on main rate assets, you use the AIA for the first £1m and Full Expensing for the remaining £200,000.

For sole traders and partnerships, the AIA is the only 100% relief option. Full Expensing is not available to them.

Planning Your Capital Expenditure Around the AIA

If you are planning significant capital expenditure, timing matters. The AIA limit resets at the start of each accounting period. If you are close to the £1m limit in one period, you might delay some purchases to the next period to stay within the limit and avoid the 18% writing down allowance on excess spend.

Example: A manufacturing company in Leeds has already spent £950,000 on qualifying assets in the current year. It plans to buy another £200,000 of equipment. If it buys now, only £50,000 qualifies for AIA. The remaining £150,000 goes into the main pool at 18% writing down allowance. If it delays the purchase by two weeks to the start of the next accounting period, the full £200,000 qualifies for AIA.

This kind of planning is straightforward but requires you to track your capital spend throughout the year. We recommend keeping a running total of qualifying purchases so you know where you stand against the £1m limit.

For more detailed guidance on capital allowances and how they fit into your overall tax position, visit our fundamentals page or contact us directly.

Common Mistakes with the Annual Investment Allowance

We see several recurring errors when reviewing AIA claims:

• Claiming AIA on cars. Passenger cars are excluded. Use the main pool or special rate pool instead.
• Forgetting to claim on fixtures. If you fit out a new office or shop, the fixtures qualify. Many businesses miss this.
• Not claiming on second-hand assets. The AIA applies to both new and used qualifying plant and machinery. Buying second-hand does not disqualify you.
• Overlooking the connected persons rule. If you buy an asset from your spouse or a company you control, the AIA is not available.
• Claiming on assets used partly for personal use. Only the business proportion qualifies.

If you are unsure whether an asset qualifies, check with your accountant before filing your return. An incorrect AIA claim can lead to HMRC enquiries and potential penalties.

AIA and Associated Companies

If you control multiple companies, the AIA limit is shared between them. HMRC treats associated companies as a single group for AIA purposes. The £1m limit is divided equally between the associated companies.

Example: You control three limited companies. The AIA limit for each company is £333,333 (1m divided by 3). If one company spends £500,000, it can only claim AIA on £333,333. The remaining £166,667 goes into the main pool.

This rule applies regardless of whether the companies are in the same trade or different trades. If you own a property company and a trading company, they are associated and share the £1m limit.

If you are planning significant capital expenditure across multiple companies, structure the purchases carefully to maximise AIA relief. Our incorporation and structure page has more detail on how associated companies work.

What Happens If You Sell an Asset You Claimed AIA On?

When you sell an asset on which you claimed AIA, the proceeds are deducted from the pool. If the proceeds exceed the pool balance, you have a balancing charge which is added to your taxable profits.

Because AIA gives 100% relief, the pool balance for that asset is typically zero after the claim. If you sell it later, the full sale proceeds are a balancing charge.

Example: You buy a machine for £50,000 and claim AIA. The pool balance is zero. Two years later, you sell the machine for £20,000. The £20,000 is added to your taxable profits in the year of sale.

This is why AIA is a timing benefit, not a permanent tax saving. You get the relief early, but you pay tax on the disposal proceeds later. The net benefit depends on the tax rates at the time of purchase versus the time of sale.

Final Thoughts on the Annual Investment Allowance

The AIA is one of the most valuable tax reliefs available to UK businesses. At £1m per year, it covers the vast majority of capital expenditure for small and medium-sized businesses. The 100% relief rate means you get the full tax benefit in the year you invest, which supports cash flow and encourages business investment.

If you are planning significant capital expenditure in 2025/26, factor the AIA into your cash flow and tax planning. Track your qualifying spend throughout the year. And if you control multiple companies, be aware of the associated company rules.

For a full breakdown of how capital allowances fit into your corporation tax return, visit our corporation tax blog. And if you need help calculating your AIA claim or planning your capital expenditure, get in touch with our team.