What Is the Annual Investment Allowance?
The Annual Investment Allowance (AIA) gives you 100% tax relief on most plant and machinery costs in the year you buy them. You deduct the full cost from your taxable profits immediately, rather than spreading the relief over several years through writing down allowances.
For the 2025/26 tax year, the AIA limit is permanently set at £1,000,000. That means a limited company or unincorporated business can claim full relief on qualifying capital expenditure up to that amount in a single accounting period.
If you spend £80,000 on a new CNC machine for your engineering workshop, you reduce your taxable profit by £80,000 in that year. At the 19% small profits rate of corporation tax, that saves you £15,200 in tax. At the 25% main rate, the saving is £20,000.
Who Can Claim the Annual Investment Allowance?
Most UK businesses can claim the AIA. That includes:
- Limited companies
- Sole traders
- Partnerships (including limited liability partnerships)
- Unincorporated associations
There are some exclusions. You cannot claim the AIA on:
- Cars (most cars are excluded, though vans and lorries qualify)
- Assets you owned before the business started and then brought into the business
- Assets given to you as a gift
- Expenditure on buildings or structures (these fall under the Structures and Buildings Allowance at 3% per year instead)
- Assets used mainly for business entertainment
If you run a business through a limited company and also operate as a sole trader, each entity gets its own AIA limit. You cannot share one £1m limit across both.
What Qualifies as Plant and Machinery for AIA?
HMRC defines plant and machinery broadly. The key test is whether the asset is used in the trade and has a function beyond simply being part of the building.
Common qualifying items include:
- Commercial vehicles (vans, lorries, tractors, trailers)
- Tools and equipment (power tools, computers, office furniture, catering equipment)
- Fixtures such as fitted kitchens, bathroom suites in a hotel, or air conditioning units
- Solar panels and other energy-saving equipment
- Agricultural machinery (tractors, combine harvesters, milking equipment)
- Manufacturing and production machinery
- IT infrastructure (servers, networking equipment, point-of-sale systems)
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 allowance schedules regularly for clients across sectors from a Shoreditch tech consultancy to a Birmingham manufacturing firm.
The £1m Limit: How It Works in Practice
The £1m limit applies per accounting period. For a limited company with a 12-month accounting period, you have the full £1m to use. For shorter periods, the limit is proportionally reduced.
Example: A company with a 9-month accounting period has an AIA limit of £750,000 (£1m x 9/12).
If your accounting period straddles 31 March 2025 and 1 April 2025, the rules change slightly. The £1m limit was made permanent from 1 April 2023, so for periods starting on or after that date, you use the £1m limit in full.
For periods that started before 1 April 2023, transitional rules apply. Most businesses will now be past that transition, but if your company has an unusual year-end, check the dates carefully.
What Happens If You Spend More Than £1m?
If your qualifying expenditure exceeds the AIA limit in a period, you claim the AIA on the first £1m. The excess goes into the main pool (18% writing down allowance per year) or the special rate pool (6% per year) depending on the asset type.
Example: A Leeds-based logistics company spends £1,400,000 on new warehouse racking and forklifts in the year to 31 March 2026.
- AIA claim: £1,000,000 (100% relief)
- Remaining £400,000 goes into the main pool at 18% writing down allowance: £72,000 relief in year one
- Total first-year relief: £1,072,000
The remaining balance in the main pool continues to attract writing down allowances in future years.
Full Expensing: An Alternative for Limited Companies
From 1 April 2023, limited companies can also use Full Expensing. This gives 100% first-year relief on most main-rate plant and machinery, with no cap. It is effectively an unlimited version of the AIA for companies only.
Sole traders and partnerships cannot use Full Expensing. They rely on the AIA and writing down allowances.
Full Expensing applies to new assets only. Second-hand assets do not qualify. The AIA covers both new and second-hand assets, which makes it more flexible for many businesses.
If your company buys new plant and machinery, you can choose between AIA and Full Expensing. In most cases, Full Expensing gives the same result (100% relief) but without the £1m cap. For second-hand assets, you must use the AIA.
The government has stated Full Expensing is permanent from April 2023. That position could change in future budgets, but for now it remains in place.
Special Rate Assets and the AIA
Some assets qualify for the AIA but then attract a lower writing down allowance on any excess. These are special rate assets, including:
- Integral features (electrical systems, cold water systems, ventilation, lifts, escalators)
- Thermal insulation added to an existing building
- Solar panels
- Cars with CO2 emissions over 50g/km (but cars are excluded from AIA entirely)
If you spend £1,200,000 on integral features for a new office fit-out in Manchester, the AIA covers the first £1m. The remaining £200,000 goes into the special rate pool at 6% writing down allowance: £12,000 in year one.
Claiming the AIA: Practical Steps
You claim the AIA through your tax return. For a limited company, that means the corporation tax return (CT600). For a sole trader or partnership, it goes on the self assessment return (SA103 or SA800).
You need to:
- Identify all qualifying capital expenditure in the period
- Separate assets into main pool and special rate pool
- Apply the AIA to qualifying expenditure up to the limit
- Calculate writing down allowances on any excess
- Enter the figures on the capital allowances pages of your return
Most accounting software handles this automatically if you set up fixed asset registers correctly. Xero, FreeAgent, and QuickBooks all have capital allowance tracking features. Sage 50 users typically manage this through the fixed asset module.
If you are unsure about the classification of an asset, ask your accountant before filing. Incorrect capital allowance claims can trigger HMRC enquiries, and correcting them later means amending the return.
Planning Your Capital Expenditure Around the AIA
If you are planning significant capital investment, timing matters. The £1m limit resets each accounting period. If you have a large purchase coming up, consider whether splitting it across two periods makes sense.
Example: A Bristol-based café group plans to spend £1,600,000 on new kitchen equipment and fit-outs. If they do it all in one year, £1m gets AIA relief and £600,000 goes into the pool at 18%. If they split it as £800,000 in year one and £800,000 in year two, both tranches get full AIA relief.
That is a difference of £600,000 of expenditure attracting 18% relief versus 100% relief. On a 25% corporation tax rate, the tax saving from timing is £123,000.
For sole traders and partnerships, the same principle applies. The AIA limit is per business, not per person. A partnership gets one £1m limit for the whole partnership.
AIA and Associated Companies
If you control multiple limited companies, the AIA limit is shared between associated companies. HMRC defines associated companies broadly. Two companies are associated if one controls the other, or both are under common control.
For a group of three associated companies, the £1m limit is divided by three. Each company gets £333,333 of AIA. If one company uses more than its share, the group can agree a different allocation, but the total cannot exceed £1m.
This rule catches many business owners who incorporate separate companies for different trades. If you own a property company and a trading company, and you control both, they are associated. Plan your capital expenditure accordingly.
Our corporate tax services team regularly advises groups on AIA allocation strategies.
Common Mistakes with the Annual Investment Allowance
We see the same errors repeatedly when reviewing capital allowance claims.
Claiming AIA on cars. Most cars are excluded. Only vans, lorries, and specialist vehicles (like hearses or mobile workshops) qualify. If you buy a car for your business, it goes into the main pool at 18% or the special rate pool at 6%, depending on CO2 emissions.
Forgetting the associated company rules. Business owners often set up a second company without realising the AIA limit is shared. The result is an overclaimed AIA and a tax bill plus interest when HMRC catches it.
Claiming on buildings. The cost of the building itself does not qualify. Only the plant and machinery within it (fittings, fixtures, equipment) qualifies. If you buy a commercial property, you need a capital allowances survey to identify the qualifying elements.
Missing the deadline. You must claim the AIA within the time limit for amending the relevant tax return. For corporation tax, that is generally 12 months after the filing deadline. For self assessment, it is 12 months after 31 January.
When the AIA Does Not Apply
Some businesses cannot use the AIA at all. If you are a sole trader or partnership with a low level of capital expenditure, the AIA still applies. There is no minimum spend.
However, if you buy an asset partly for business and partly for private use, you only claim the AIA on the business proportion. A van used 70% for business and 30% for personal use means you claim AIA on 70% of the cost.
Assets acquired through hire purchase or finance leases qualify for the AIA based on the capital cost, not the total payments. The interest element is a separate revenue expense.
Structures and Buildings Allowance vs AIA
The Structures and Buildings Allowance (SBA) gives 3% straight-line relief per year on the cost of new commercial buildings and structures. It is not the same as the AIA.
If you build a new warehouse for £500,000, you cannot claim AIA on the building cost. You claim SBA at £15,000 per year for 33 years. The plant and machinery inside the warehouse (racking, lighting, heating) qualifies for AIA separately.
Many businesses miss the SBA entirely. If you have built or extended commercial premises since October 2018, check whether you should be claiming it.
Getting Professional Advice
The AIA is straightforward for most businesses, but the interaction with Full Expensing, associated company rules, and special rate assets can complicate things. If your capital expenditure exceeds £500,000 in a year, or if you are part of a group, take advice before filing.
Our team of ICAEW qualified accountants can review your capital allowance position and ensure you claim everything you are entitled to. We work with businesses across the UK, from a sole trader electrician in Glasgow to a multi-company group in the Northern Quarter in Manchester.
If you are planning significant capital investment in 2025/26, get in touch. We can model the tax impact of different spending timings and help you structure the purchases for maximum relief.
For more background on how capital allowances fit into your overall tax position, see our business tax fundamentals guide.