The Annual Investment Allowance (AIA) is one of the most valuable tax reliefs available to UK limited companies and unincorporated businesses. It gives you 100% tax relief on qualifying plant and machinery costs in the year you buy them, up to a set annual limit.

For the 2025/26 tax year, the AIA limit remains at £1,000,000. That is the same permanent level introduced in January 2019. No change. No temporary reduction. You can claim the full £1m on most plant and machinery purchases made by your business.

This article covers the 2025/26 rates, what qualifies, what does not, and exactly how to claim the relief on your corporation tax return or self assessment.

What Is the Annual Investment Allowance?

The AIA lets you deduct the full cost of qualifying plant and machinery from your taxable profits immediately. Instead of spreading the cost over several years through standard capital allowances (writing down allowances at 18% or 6% per year), you get 100% relief in one go.

For a limited company paying 19% or 25% corporation tax, that means a £100,000 piece of equipment saves you between £19,000 and £25,000 in tax in the same accounting period.

The allowance is available to most businesses. Limited companies, sole traders, partnerships, and LLPs can all use it. The only businesses excluded are those where the AIA is specifically restricted, which we cover below.

Annual Investment Allowance 2025: The Rates and Limits

For the 2025/26 tax year (and accounting periods starting on or after 1 April 2025 for companies), the AIA limit is £1,000,000. This applies to most plant and machinery expenditure.

Here is the current structure:

  • AIA limit: £1,000,000 per 12-month period
  • Relief rate: 100% of qualifying expenditure
  • Applies to: Most plant and machinery (main pool and special rate pool items)
  • Excluded: Cars (with limited exceptions), assets bought before the business started trading, assets gifted to the business

If your accounting period is shorter than 12 months, the AIA limit is proportionally reduced. A 6-month period gives you £500,000. A 9-month period gives you £750,000.

If your business has multiple associated companies, the £1m limit is shared between them. Associated companies are those under common control. Each associated company reduces the group's total AIA limit. For example, if you control three companies, the £1m limit is split three ways, giving each company roughly £333,333.

What Qualifies for the Annual Investment Allowance?

The AIA covers most plant and machinery. HMRC defines plant and machinery broadly. It includes equipment you use in your trade, not the building itself.

Common qualifying items include:

  • Commercial vehicles (vans, lorries, tractors)
  • Machinery and industrial equipment
  • Office furniture and shelving
  • Computer hardware and servers
  • Fixtures and fittings (kitchens, bathroom suites in rental properties, air conditioning, lifts)
  • Solar panels and renewable energy systems
  • Construction equipment (diggers, cement mixers, scaffolding)
  • Refrigeration and catering equipment

Second-hand assets qualify too. You do not need to buy new. The AIA applies to both new and used plant and machinery, as long as it is unused by your business before purchase.

What Does Not Qualify?

Several categories are specifically excluded from the AIA:

  • Cars. Most cars do not qualify for the AIA. The only exception is if the car is new and has zero CO2 emissions (electric cars). Those qualify for a 100% first-year allowance instead, which gives the same result.
  • Assets bought before the business started trading. If you bought equipment before your first day of trading, it does not qualify for the AIA. You claim writing down allowances instead.
  • Assets gifted to the business. If someone gives you equipment, you cannot claim the AIA on its market value.
  • Buildings and structures. The AIA does not cover the cost of buying or constructing buildings. However, integral features within a building (like lifts, air conditioning, electrical systems) can qualify as plant.
  • Land and property. Land does not qualify. Neither do structures like walls, fences, or car parks.

How to Claim the Annual Investment Allowance

Claiming the AIA is straightforward. You include the qualifying expenditure on your capital allowances computation, which forms part of your corporation tax return (CT600) or self assessment return (SA100 with SA103).

Here is the process step by step:

Step 1: Identify qualifying expenditure. Go through your asset register or purchase invoices for the accounting period. Identify all plant and machinery purchases that qualify for the AIA. Exclude cars, buildings, and other non-qualifying items.

Step 2: Calculate the AIA claim. Total up the qualifying expenditure. If it is £1m or less, you can claim 100% relief on the full amount. If it exceeds £1m, the first £1m gets 100% relief. The excess goes into the main pool or special rate pool for writing down allowances (18% or 6% per year).

Step 3: Enter the claim on your tax return. For a limited company, the capital allowances go on the corporation tax return. Most accounting software (Xero, FreeAgent, QuickBooks) handles this automatically if you tag assets correctly. Your accountant will prepare the capital allowances schedule as part of the year-end accounts.

Step 4: Keep records. HMRC can ask for evidence. Keep purchase invoices, delivery notes, and any finance agreements for at least 6 years after the end of the accounting period.

AIA vs Full Expensing: What Is the Difference?

From April 2023, the government introduced Full Expensing for limited companies. This gives 100% relief on most main pool plant and machinery, with no cap. It is similar to the AIA but with key differences.

Full Expensing applies only to new plant and machinery bought by limited companies. It does not cover second-hand assets. The AIA covers both new and used.

Full Expensing has no monetary cap. The AIA is capped at £1m. For most small and medium businesses, the AIA is more relevant because it covers second-hand assets and is available to all business structures, not just limited companies.

If you are a limited company buying new equipment, you can choose between the AIA and Full Expensing. The result is the same: 100% relief. The AIA is simpler for mixed purchases (new and second-hand) because you apply it to the total qualifying spend up to £1m.

Special Rate Pool Assets and the AIA

Some assets qualify for the AIA but go into the special rate pool rather than the main pool. These include:

  • Integral features (lifts, air conditioning, electrical systems, water systems)
  • Thermal insulation added to an existing building
  • Solar panels
  • Cars with CO2 emissions above 50g/km (but cars do not qualify for the AIA anyway)

For special rate pool assets, the AIA still gives 100% relief. Without the AIA, these assets would attract writing down allowances at only 6% per year. The AIA is particularly valuable for special rate pool items because the alternative relief is so slow.

Practical Example: Claiming the AIA

Let us run through a worked example.

ABC Consulting Ltd has a 12-month accounting period ending 31 March 2026. During the year, the company buys:

  • A new server and IT equipment: £28,400
  • Office furniture: £12,600
  • A second-hand van: £22,000
  • Air conditioning for the office: £15,000 (special rate pool asset)
  • A new electric car: £52,000 (qualifies for first-year allowance, not AIA)

Total qualifying AIA expenditure: £28,400 + £12,600 + £22,000 + £15,000 = £78,000.

All £78,000 qualifies for 100% relief under the AIA. The company deducts £78,000 from its taxable profits. At 19% corporation tax, that saves £14,820 in tax.

The electric car goes through the main pool at 18% writing down allowance (or 100% first-year allowance if the company elects for it).

Planning Points for 2025/26

The £1m AIA limit is generous. Most small and medium businesses never hit it. But if you are planning significant capital expenditure, there are a few things to consider.

Timing matters. If your accounting period straddles two tax years, the AIA limit is calculated on a pro-rata basis. A 15-month period gives you £1.25m. A 9-month period gives you £750,000. Plan your purchases around your year-end if you are close to the limit.

Associated companies. If you control multiple companies, check whether they are associated. The £1m limit is shared. A group of 5 associated companies gets £200,000 each. This can catch out business owners who have a trading company and a property company under common control.

Group relief. If one company in a group cannot use its full AIA, the group can surrender losses to another group company. This is complex and needs careful planning. Speak to your accountant before making large purchases.

Full Expensing vs AIA. For limited companies buying new assets, Full Expensing may be simpler because it has no cap. But the AIA covers second-hand assets, which is often more practical for growing businesses buying used equipment.

If you are unsure which relief to use, your accountant can model both options. The result is usually the same for most purchases.

What Happens If You Exceed the AIA Limit?

If your qualifying expenditure exceeds £1m in a 12-month period, the first £1m gets 100% relief. The excess goes into the main pool or special rate pool and attracts writing down allowances at the appropriate rate.

For main pool assets, that is 18% per year on a reducing balance basis. For special rate pool assets, it is 6% per year.

If you are a limited company, Full Expensing may cover the excess on new assets. But for second-hand assets above £1m, you are stuck with writing down allowances.

This is rare for most businesses. Only companies with very high capital expenditure need to worry about it.

How Holloway Davies Can Help

As ICAEW qualified accountants, we help businesses across the UK claim the right capital allowances, including the Annual Investment Allowance. We review your asset purchases, prepare the capital allowances computation, and ensure your corporation tax return reflects the correct relief.

If you are planning significant capital expenditure in 2025/26, we can model the tax impact and help you time purchases for maximum benefit.

Contact our team to discuss your situation. We work with limited companies, sole traders, and partnerships across all sectors.

For more guidance on related topics, see our corporation tax blog or our full range of services.