Buy a piece of equipment and, under normal accounting rules, you depreciate it over its useful life. Tax does not work that way: depreciation is not deductible, and capital allowances take its place. The annual investment allowance (AIA) is the most widely used of them, and the most generous for most businesses: 100% relief on qualifying plant and machinery in the year you buy it, up to £1,000,000 of spend per 12-month accounting period.[1]
The £1m cap is permanent. You may still find guidance quoting a £200,000 reversion date; that reversion was cancelled when the £1m level, previously a temporary measure on repeated extensions, was made permanent from April 2023, and no reduction is scheduled. Plan on £1m.
This page explains what the AIA is, what it is actually worth in tax saved, how it compares with the other capital allowance reliefs, and when not claiming it is the smarter move. The claiming mechanics (exactly what qualifies, vans versus cars, second-hand assets, the shared group limit, the boxes on the return) live in our companion guide, AIA capital allowances: what qualifies and how to claim.
What Is the Annual Investment Allowance?
The AIA is a 100% first-year deduction for qualifying plant and machinery: equipment, machinery, commercial vehicles, computers, office furniture, fixtures and integral features. Spend £50,000 on a machine, deduct £50,000 from taxable profit in that period. No spreading, no pooling, no waiting.
It is available to limited companies, sole traders and partnerships (except partnerships with a corporate partner), against the same £1m cap, on both new and second-hand assets. Cars are the one headline exclusion. The rate on plant and machinery within the cap is simply 100%.
Anything the AIA does not cover, either because the cap is exhausted or because you chose not to claim, falls into a pool for writing down allowances: 14% a year on the main pool for periods beginning from April 2026, 6% on the special rate pool.
How Much Tax Does the AIA Actually Save?
The cash value of the deduction depends on your marginal tax rate, which is where the AIA gets interesting for planning.
Worked Example: Limited Company in the Marginal-Relief Band
A Sheffield design studio buys £74,000 of computer equipment and furniture in its year ending 31 March 2026. Taxable profit before capital allowances is £210,000.
Without the claim, corporation tax on £210,000 is 25% x £210,000 = £52,500, minus marginal relief of 3/200 x (£250,000 - £210,000) = £600, so £51,900. With a full AIA claim, profit falls to £136,000 and the tax is 25% x £136,000 = £34,000, minus 3/200 x (£250,000 - £136,000) = £1,710, so £32,290. The AIA saves £19,610, an effective 26.5% on every pound of spend, because the whole deduction lands inside the marginal-relief band.
Worked Example: Higher-Rate Sole Trader
A sole trader electrician in Swansea buys a van for £38,000 and £2,000 of tools: £40,000 of qualifying spend against profits of £85,000 (2025/26). The claim takes taxable profit to £45,000. The relieved slice from £45,000 to £50,270 saves 20% income tax plus 6% Class 4 NIC (26%), and the slice from £50,270 to £85,000 saves 40% plus 2% (42%): £5,270 x 26% = £1,370 plus £34,730 x 42% = £14,587, a total saving of about £15,957. Nearly 40p per pound spent, all in year one.
AIA vs WDA vs Full Expensing vs the 40% FYA
The AIA is one of four routes to relief on the same pound of plant and machinery spend, and you choose per asset:
| Relief | Rate and cap | Who can claim | New or second-hand? | Best used for |
|---|---|---|---|---|
| Annual Investment Allowance | 100%, capped at £1m per 12 months (permanent) | Companies, sole traders, partnerships | Both | Second-hand assets, special rate spend, and all unincorporated-business spend |
| Full expensing | 100% main rate / 50% special rate, uncapped | Companies only | New and unused only | A company's new main-rate plant, preserving the AIA for everything else |
| 40% first-year allowance (FA 2026, expenditure from 1 January 2026) | 40% in year one, balance to the main pool; uncapped | Companies, sole traders, partnerships | New and unused only (not cars) | New plant once the £1m AIA is exhausted, mainly for unincorporated businesses |
| Writing down allowance | 14% main pool / 6% special rate (periods from April 2026), reducing balance | Everyone | Both (and the only route for cars) | The backstop: whatever no first-year relief covers, plus deliberate deferrals |
The WDA rate change (18% down to 14% from April 2026, with a hybrid rate for straddling periods) is covered in depth in our writing down allowance rates guide; the point for AIA decisions is simply that the pool got slower, so upfront reliefs are worth more than they used to be.
Which Relief Should You Claim First?
Limited company buying new main-rate plant: claim full expensing. It gives the same 100% as AIA with no cap, so using it first preserves your £1m AIA for the things full expensing cannot touch: second-hand assets, and special rate assets (integral features, long-life assets) where full expensing only gives 50% but AIA gives 100%.
Limited company buying second-hand kit or integral features: AIA first. A £60,000 second-hand machine gets 100% under AIA and nothing under full expensing. A £100,000 electrical system gets 100% under AIA against 50% under special-rate full expensing.
Sole trader or partnership: AIA first, always, because full expensing is closed to you. If your spend on new plant exceeds the £1m cap, the 40% first-year allowance takes the next slice: 40% relief in year one on the excess, with the remaining 60% entering the main pool for WDAs. A £1.2m spend on new machinery by a large partnership gets £1m at 100% (AIA) plus £80,000 (40% of the £200,000 excess), relieving £1,080,000, or 90% of the total, in year one.
Our consolidated 2026/27 capital allowances guide walks the full claiming order, and our worked capital allowances example runs one purchase through the whole system.
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When NOT to Claim the AIA
The AIA is a claim, not a default, and there are three situations where claiming the maximum wastes relief:
- Profits too low to use the deduction well. A company with £48,000 of profit relieves every AIA pound at 19% (the small profits rate). If next year's profits will sit in the 26.5% marginal band or at the 25% main rate, a pound of relief deferred is worth up to 7.5p more, at the cost of arriving slowly through 14% WDAs.
- A loss you cannot use. AIA in a loss year deepens the loss. If you can carry it back 12 months against tax already paid, that is often fine; if the loss can only crawl forward, disclaiming and pooling keeps the relief flexible.
- Managing the corporation tax bands. Profit just above £50,000 pays 26.5% on the excess. A partial AIA claim sized to bring profit down to £50,000 relieves spend at 26.5% and parks the rest in the pool for later, rather than wasting relief at 19% below the threshold.
You do not have to choose all or nothing: claim any amount up to the cap and pool the rest. The mechanics of partial claims and disclaimers are on the claiming guide.
A Worked Planning Example
A Norwich engineering company, year ending 31 March 2027, expects £60,000 of profit before allowances this year and £300,000 next year. It is buying £45,000 of new machinery in February 2027.
Option 1: full relief now (full expensing or AIA, both 100% here). Profit falls to £15,000, taxed at 19%. The £45,000 deduction saves £45,000 x 19% = £8,550, all this year.
Option 2: defer into the pool. Claim nothing upfront; the £45,000 enters the main pool. Next year's WDA is £45,000 x 14% = £6,300, saving £6,300 x 25% = £1,575 in year one of the deferral, with the £38,700 balance relieving at 14% reducing balance in the years after, each pound at 25% rather than 19%.
Deferring earns up to 6p more per pound eventually (25% against 19%) but at 14% reducing balance roughly half the cost is still unrelieved after five years, so the extra rate rarely beats the wait unless profits are rising sharply and cash flow is comfortable. A middle path often wins: claim enough AIA to use up the 19%-band profit and defer the rest. This is exactly the modelling we do for clients before year end.
Final Thoughts
The annual investment allowance is the workhorse of UK capital allowances: 100% relief, a permanent £1m cap, open to every business structure, new or second-hand. The decisions worth actual money are the ones around it: companies sequencing full expensing before AIA, unincorporated businesses layering the 40% FYA on top, and anyone with low-but-rising profits deciding how much relief to take now versus later.
For the claiming detail (what qualifies, vehicles, connected parties, the shared group limit, the return boxes) see AIA capital allowances: what qualifies and how to claim. To model a specific purchase before you commit, contact our team or browse our services.
Sources
- Claim capital allowances: annual investment allowance. GOV.UK. gov.uk/capital-allowances/annual-investment-allowance. Retrieved 2026-08-25.
- Rates and allowances for corporation tax. GOV.UK. gov.uk/government/publications/rates-and-allowances-corporation-tax. Retrieved 2026-08-25.
- Finance Act 2026, section 29 (40% first-year allowance, inserting Capital Allowances Act 2001 sections 45U and 45V). legislation.gov.uk. legislation.gov.uk/ukpga/2026/11/section/29. Retrieved 2026-08-25.