What Is the Annual Investment Allowance (AIA)?

The Annual Investment Allowance (AIA) is a capital allowance that lets you deduct the full cost of most plant and machinery from your taxable profits in the year you buy it. Instead of spreading the cost over several years through writing down allowances, you get 100% relief immediately.

For the 2025/26 tax year, the AIA limit is £1,000,000. That is a temporary increase that has been in place since 1 January 2019 and is currently set to remain at that level. If you spend up to £1m on qualifying assets in a single accounting period, you can write off the whole amount against your profits.

As ICAEW qualified accountants, we see businesses miss out on this relief every year because they do not realise what qualifies or they fail to track their capital spend properly.

Who Can Claim the AIA?

Most businesses can claim the AIA. That includes limited companies, sole traders, and partnerships. There are a few exceptions. Partnerships where one or more partners is a limited company cannot claim the AIA. Neither can businesses that are buying assets to lease out, unless they are in the business of hiring plant and machinery.

If you run a limited company, you claim the AIA through your corporation tax return (CT600). Sole traders and partnerships claim it through their self assessment return (SA103 for sole traders, SA800 for partnerships).

What Qualifies for the AIA?

The AIA covers most plant and machinery. That is a broad category in tax law, but in practice it includes:

  • Office furniture and equipment (desks, chairs, computers, printers)
  • Tools and machinery used in your trade (power tools, lathes, diggers, ovens)
  • Commercial vehicles (vans, lorries, pickup trucks)
  • Fixtures that are integral to a building (heating systems, air conditioning, lifts, electrical systems)
  • Computer software that is not part of a larger intangible asset
  • Solar panels and other energy-saving equipment

There is a key distinction between plant and machinery and the building itself. You cannot claim the AIA on the cost of buying or constructing a building. You also cannot claim it on land, cars (with limited exceptions for some zero-emission vehicles), or assets you owned before you started the business.

If you buy a second-hand asset from a connected party, the AIA is restricted. The same applies if you acquire a business as a going concern and the assets have already been claimed on by the previous owner.

What Does Not Qualify?

Some assets are specifically excluded from the AIA. The main ones are:

  • Cars. Most cars go into the main rate or special rate pool and attract writing down allowances at 18% or 6% per year. Zero-emission cars qualify for 100% first year allowances instead.
  • Assets you already owned before the business started. These go into the pool at market value and attract writing down allowances.
  • Assets gifted to you or inherited. Same treatment as above.
  • Assets used partly for non-business purposes. The AIA is restricted to the business use proportion.
  • Long-life assets (expected to last 25+ years) in some cases, though the £1m limit usually covers these.

How the AIA Interacts with Other Capital Allowances

The AIA is not the only capital allowance available. Full Expensing is another 100% relief that applies to most main rate plant and machinery bought by limited companies from 1 April 2023. The key difference is that Full Expensing has no monetary cap, while the AIA is capped at £1m. For most small and medium businesses, the AIA is sufficient.

If you spend more than £1m in a year, the excess goes into the main rate pool (18% writing down allowance) or special rate pool (6% writing down allowance), depending on the asset type. You can also claim the AIA on special rate assets like integral fixtures, but the £1m limit is shared across all qualifying spend.

Structures and Buildings Allowance (SBA) gives 3% straight-line relief on the cost of constructing or renovating commercial buildings. That is separate from the AIA and runs alongside it.

Claiming the AIA on Your Tax Return

For limited companies, you claim capital allowances including the AIA in the capital allowances section of your CT600 corporation tax return. You will need to list the cost of qualifying assets, the amount of AIA you are claiming, and any balance carried forward to the pool.

For sole traders and partnerships, you claim capital allowances in the self-employment pages of your self assessment return (SA103 or SA800). The same principle applies: you deduct the AIA from your trading profits before arriving at your taxable profit.

If you use accounting software like Xero, FreeAgent, or QuickBooks, you can track fixed assets and capital allowances within the software. Most packages have a fixed asset register module that calculates the allowances for you. Just make sure the settings reflect the current AIA limit.

We cover this in more detail on our services page, where we explain how we handle capital allowance claims for clients across different sectors.

Practical Example: A Manchester Consultancy

Take a limited company running a software consultancy in Manchester's Northern Quarter. In the year to 31 March 2026, the company spends £47,500 on new computers, desks, monitors, and office furniture. All of it qualifies as plant and machinery.

Without the AIA, the company would add the £47,500 to its main rate pool and claim 18% writing down allowance in year one: £8,550. The remaining £38,950 carries forward to the next year.

With the AIA, the company claims the full £47,500 in year one. That reduces its taxable profits by £47,500. At 19% corporation tax (small profits rate), that saves £9,025 in tax. At 25% (main rate), it saves £11,875.

The difference is significant. And it is entirely legitimate.

Timing Your Purchases

The AIA limit is £1m per accounting period. If your accounting period is shorter than 12 months, the limit is reduced proportionally. A 6-month period gives you a £500,000 limit.

If you are close to the end of your accounting period and planning a large capital purchase, it can make sense to bring it forward or delay it depending on your profit position. If you have high profits this year and expect lower profits next year, bring the purchase forward to maximise the tax saving. If profits are low this year but will be higher next year, delay the purchase.

This is where good tax planning matters. A conversation with your accountant before you spend the money is worth more than a conversation after.

Partial Business Use

If you use an asset partly for business and partly for private purposes, the AIA is restricted to the business proportion. A laptop used 70% for business and 30% for personal use means you claim AIA on 70% of the cost. The remaining 30% is not allowable.

You need to keep a record of your business use percentage. A log or diary is fine. HMRC can ask for it if they open a compliance check.

Disposals and the AIA

When you sell or dispose of an asset on which you claimed the AIA, you need to account for the disposal in your capital allowances computation. The disposal proceeds (or market value) reduce the pool balance. If the pool balance becomes negative, the negative amount is added to your taxable profits as a balancing charge.

This is standard capital allowances treatment. The AIA gives you upfront relief, but the tax is clawed back if you sell the asset for more than its tax written down value.

Common Mistakes

We see three mistakes regularly:

  • Claiming the AIA on cars. Most cars do not qualify. Check the CO2 emissions and the type of vehicle before you claim.
  • Forgetting to claim the AIA at all. Some businesses put all their capital spend into the pool and claim writing down allowances, missing the 100% relief entirely.
  • Not tracking capital spend separately from revenue spend. If you mix capital and revenue costs in your bookkeeping, you will struggle to identify what qualifies for the AIA at year end.

If you are unsure whether an asset qualifies, check the HMRC guidance or speak to your accountant. The cost of getting it wrong can be higher than the cost of asking.

For a full breakdown of how capital allowances fit into your overall tax position, take a look at our fundamentals page.

Planning Ahead

The £1m AIA limit is temporary. It has been extended several times, but there is no guarantee it will stay at this level. If the limit drops back to £200,000 (the previous permanent level), businesses with large capital spend will need to plan their purchases more carefully.

If you are considering a significant capital investment in the next 12 to 18 months, factor the AIA into your decision. The tax saving can make a borderline investment viable.

We help clients across all sectors with capital allowance planning. If you want to discuss your specific situation, contact us for a consultation.