What is the Annual Investment Allowance (AIA)?
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. No spreading the cost over several years. No complicated calculations.
For the 2024/25 tax year, the AIA limit is permanently set at £1,000,000. This was confirmed in the Spring Budget 2023 and applies to most businesses, whether you are a limited company, sole trader, or partnership.
If your business spends £50,000 on a new CNC machine, a digger, or a commercial oven, you can deduct the full £50,000 from your profits in that accounting period. That saves you £9,500 in corporation tax at the 19% small profits rate, or £12,500 at the 25% main rate.
Who can claim the AIA?
Most businesses that pay UK corporation tax or income tax on trading profits can claim the AIA. This includes:
- Limited companies
- Sole traders and partnerships
- Limited liability partnerships (LLPs)
There is one restriction: you cannot claim the AIA if you are buying the asset from a connected person, such as your spouse or a company you control. The rules are designed to stop artificial tax avoidance, not genuine business purchases.
If you are a director buying plant through your own limited company, that is fine. Just make sure the asset is used wholly or mainly for the trade.
What qualifies for the AIA?
The AIA covers most plant and machinery used in your business. HMRC defines plant and machinery broadly. Common examples include:
- Commercial vehicles (vans, lorries, tipper trucks)
- Tools and equipment (power tools, catering equipment, medical devices)
- Office furniture and IT equipment (desks, computers, servers)
- Fixtures in a commercial property (air conditioning, lifts, security systems)
- Agricultural machinery (tractors, harvesters, milking equipment)
- Solar panels and other energy-saving equipment
There are important exclusions. The AIA does not cover:
- Cars (these go into the main pool at 18% or special rate pool at 6%)
- Land and buildings (structures and buildings get a separate 3% allowance)
- Assets used partly for non-business purposes
- Assets bought before you started the trade
- Gifts or assets received as a capital contribution
If you are unsure whether a specific asset qualifies, check the HMRC Capital Allowances manual or speak to an accountant. As ICAEW qualified accountants, we review capital allowances schedules regularly for clients across Manchester, Birmingham, and Bristol. The rules are detailed but the principle is straightforward: if it is plant or machinery used in your trade, it likely qualifies.
How much can you claim in 2024/25?
The AIA limit is £1,000,000 per 12-month accounting period. This applies to all businesses, regardless of size. There is no tapering or reduction for smaller businesses.
If your accounting period is shorter than 12 months, the limit is reduced proportionally. For example, a 6-month period gives a £500,000 limit. If your period is longer than 12 months, you get the £1m limit for the first 12 months and a proportion for the extra months.
Here is a worked example. A Manchester-based software consultancy buys £80,000 of new servers and networking equipment in the year to 31 March 2025. The company has taxable profits of £420,000. The full £80,000 qualifies for AIA. The company deducts £80,000 from its profits, reducing taxable profits to £340,000. Corporation tax at 25% on the reduced profit saves £20,000 in tax compared to not claiming the AIA.
If the same company spent £1.2m on qualifying plant, only the first £1m gets AIA relief. The remaining £200,000 goes into the main pool at 18% writing down allowance. That is still good relief, just not immediate.
How to claim the AIA
You claim the AIA through your tax return. For limited companies, that means the CT600 corporation tax return. For sole traders and partnerships, it is the self-assessment return (SA100 with SA103 or SA800).
You do not need to submit a separate form. The claim is made by including the capital allowances calculation in the relevant box of your return. Most accounting software handles this automatically if you enter the asset cost and select the AIA pool.
If you use Xero, FreeAgent, or QuickBooks, the capital allowances section is usually under the fixed assets or depreciation module. The software calculates the AIA claim based on the asset cost and date of purchase.
For manual returns, you calculate the total qualifying expenditure, apply the AIA up to the £1m limit, and enter the result in the capital allowances box. Keep a detailed schedule of assets bought, dates, and costs. HMRC may ask for this if they open a compliance check.
If you are using an accountant, they will handle the calculation and submission. Our team at Holloway Davies prepares capital allowances schedules for clients across all sectors, from trades in Leeds to consultancies in Shoreditch.
What about Full Expensing?
Full Expensing is a separate relief introduced from 1 April 2023. It gives 100% first-year relief on most main-rate plant and machinery, with no cap. The AIA still exists alongside Full Expensing.
For most businesses, Full Expensing is simpler because there is no £1m limit. However, Full Expensing is only available to limited companies. Sole traders and partnerships cannot use it. They rely on the AIA.
If you are a limited company spending more than £1m on qualifying plant, Full Expensing may be better. If you are spending under £1m, the AIA gives the same result. The key difference is that Full Expensing applies to main-rate assets only, while the AIA also covers special-rate assets like integral features and long-life assets.
We cover this in more detail on our services page, where we explain how we structure capital allowances claims for different business types.
Common mistakes and pitfalls
Several errors crop up regularly when businesses claim the AIA.
Claiming on cars. Cars are excluded from the AIA. They go into the main pool at 18% or the special rate pool at 6%, depending on CO2 emissions. Electric cars get 100% first-year allowances, but that is a different relief.
Forgetting the connected party rule. If you buy an asset from your spouse or a company you control, the AIA is not available. The same applies if you buy from a partnership you are a member of.
Not tracking the accounting period correctly. If your accounting period is not 12 months, the AIA limit changes. A 9-month period gives a £750,000 limit. A 15-month period gives £1m for the first 12 months and £250,000 for the extra 3 months.
Claiming on assets used partly for private purposes. If you use a van for both business and personal travel, only the business proportion qualifies. You must apportion the cost.
Missing the deadline. You must claim the AIA within 12 months of the filing date for the return. For a limited company with a 31 March 2025 year-end, the filing date is 31 December 2025. You have until 31 December 2026 to amend the return and add the claim. After that, the claim is lost.
Planning your capital purchases
The £1m AIA limit is generous. Most small and medium businesses will not exceed it. But if you are planning a large capital investment, timing matters.
If you buy plant in the last month of your accounting period, the AIA still applies. You get full relief in that year. There is no need to spread the purchase across two years.
If you are close to the £1m limit, consider deferring some purchases to the next period. That keeps you within the AIA and avoids the lower writing down allowance rates on the excess.
For businesses with fluctuating profits, the AIA can be used to smooth taxable profits. If you have a high-profit year, accelerate capital spending to reduce the tax bill. If profits are low, delay spending to preserve the AIA for a future year.
This kind of planning is where an accountant adds real value. Our contact page is open if you want to discuss your specific situation.
AIA and the associated companies rule
If you control multiple companies, the £1m AIA limit is shared between them. This is the associated companies rule. Two companies under common control get £500,000 each. Three companies get £333,333 each. The total across the group cannot exceed £1m.
The same applies if you are a sole trader or partnership with associated companies. The limit is divided by the number of associated companies plus one (for the unincorporated business).
This rule catches many business owners who run a trading company and a property company, or a main company and a dormant company. Even a dormant company counts as associated if it is under common control.
If you are in this situation, plan your capital spending across the group carefully. You may need to allocate the AIA to the company making the largest investment.
What records do you need to keep?
HMRC can ask for evidence of your AIA claim up to 12 months after the filing date. Keep the following records:
- Invoices for each asset purchased
- Proof of payment (bank statements, credit card statements)
- A schedule showing the asset description, date of purchase, cost, and AIA claimed
- Details of any private use apportionment
- Confirmation that the asset is used wholly or mainly for the trade
If you use accounting software, the fixed asset register should contain all this information. Export it annually and store it with your tax records.
For more on record-keeping requirements, see our bookkeeping and compliance blog.
What if you sell an asset you claimed AIA on?
When you sell an asset that qualified for the AIA, you must account for the disposal. The proceeds reduce the pool balance. If the pool balance becomes negative, the negative amount is added to your profits as a balancing charge.
This is standard capital allowances treatment. The AIA gives upfront relief, but the disposal proceeds are brought back into the tax computation later. Over the life of the asset, the total relief equals the net cost after disposal.
If you sell the asset within the same accounting period you bought it, the AIA claim is adjusted. You only get relief on the net cost.
Final thoughts
The AIA is one of the most valuable tax reliefs for UK businesses. At £1m per year, it covers the vast majority of capital purchases. The relief is immediate and simple to claim.
If you are planning significant capital investment in 2024/25, factor the AIA into your cash flow and tax planning. The tax saving can be substantial, especially for businesses paying corporation tax at 25%.
If your turnover crossed the VAT threshold or you are considering incorporation, the AIA interacts with other reliefs. Our incorporation page covers how capital allowances transfer when you move from sole trader to limited company.
For a full breakdown of how we handle capital allowances claims across different business structures, visit our services page or get in touch through our contact page.