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Tax ReliefUpdated 2026-02-12

What is the Annual Investment Allowance?

Quick Answer

The Annual Investment Allowance (AIA) lets businesses claim 100% tax relief on qualifying capital expenditure up to £1 million per year. It covers plant and machinery purchases.

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Detailed Explanation

Annual Investment Allowance (AIA)

Current limit

£1,000,000 per year (permanent from April 2023)

What qualifies

- Plant and machinery - Computer equipment - Office furniture - Vehicles (excluding cars) - Tools and equipment - Some fixtures in buildings

What doesn't qualify

- Cars (use Writing Down Allowance instead) - Buildings themselves - Land - Items given to you - Items leased to others

How it works

- Deduct 100% of qualifying cost from profits in year of purchase - Reduces Corporation Tax bill - Example: £10,000 computer equipment = £10,000 deduction = £2,500 tax saving (at 25%)

Exceeding the limit

If you spend over £1m, excess goes into 'pools' and qualifies for Writing Down Allowance (18% or 6% per year depending on type).

Timing

- Asset must be bought and available for use - For accounting periods straddling April, limit is apportioned - Group companies share the £1m limit

Full expensing (from April 2023)

For companies, you can also claim 100% relief on new qualifying plant and machinery with no limit, as an alternative to AIA. This is particularly useful for spending over £1m.

Source: HMRC Capital Allowances

Real-World Examples

New Manufacturing Equipment

Your limited company, a small manufacturing business, purchases new CNC milling machines for £600,000. You can deduct the full £600,000 from your profits using the AIA in the year of purchase, significantly reducing your corporation tax liability.

Office Refurbishment

You spend £80,000 on office furniture, computer equipment, and a new server for your growing marketing agency. Because this is all qualifying expenditure, you can claim the entire £80,000 against your taxable profits in the current accounting period using the AIA.

Expanding a Restaurant Kitchen

You invest £1,200,000 in new kitchen equipment for your restaurant expansion. You can claim £1,000,000 through AIA, and the remaining £200,000 will be eligible for writing down allowance at the appropriate rate.

Common Mistakes to Avoid

  • Forgetting to claim the AIA on your corporation tax return, resulting in paying more tax than necessary.
  • Assuming that all assets qualify for AIA – remember cars, land, and buildings are specifically excluded.
  • Not keeping detailed records of asset purchases, making it difficult to justify your AIA claim to HMRC if audited.
  • Failing to pro-rate the AIA if your accounting period is less than 12 months.

If I buy an asset partway through the year, does that affect my AIA?

No, the AIA is a full annual allowance, irrespective of when during your accounting period the purchase occurs. You can claim up to £1,000,000 regardless of purchase timing.

What happens if I sell an asset I previously claimed AIA on?

When you sell the asset, you may have to declare a balancing charge which will increase your taxable profit. This recoups some or all of the tax relief you previously claimed. Seek professional advice.

Can I claim AIA on second-hand equipment?

Yes, you can claim AIA on second-hand equipment as long as it is plant and machinery and meets the other eligibility criteria. The fact it is pre-owned is irrelevant.

If I don't use the full £1,000,000 AIA in one year, can I carry it forward?

No, the Annual Investment Allowance cannot be carried forward to future tax years. Use it or lose it in the current accounting period.

Can I claim AIA on items I buy for personal use but sometimes use for business?

No, the AIA is only for items wholly and exclusively for business use. If there is a personal element, you need to apportion the costs, and you may not be able to claim AIA on the personal portion.

Practical Tips

  • Keep detailed records of all asset purchases, including invoices, dates of purchase, and descriptions of the items to support your AIA claim.
  • Review your planned capital expenditure at the beginning of each accounting period to maximize your use of the AIA. Consider bringing forward or delaying purchases to optimize your tax position.
  • When preparing your corporation tax return (CT600), clearly identify the amount of AIA claimed and ensure it aligns with your supporting documentation.
  • Consult with a qualified accountant or tax advisor to ensure you are claiming the AIA correctly and maximizing your tax savings, especially for complex or high-value purchases.

Related Questions

Can I buy a car through my company?

Yes, but if you use it personally, you'll pay Benefit in Kind (BIK) tax based on the car's list price and CO2 emissions. Electric cars have the lowest BIK (4% in 2026/27).

What is R&D tax relief?

R&D tax relief allows companies to claim extra tax deductions or cash credits for qualifying research and development expenditure. SMEs can claim up to 21.5% of qualifying costs as a cash credit.

How does pension tax relief work for company directors?

Company pension contributions get full Corporation Tax relief with no personal tax. Personal contributions get relief at your marginal rate. Annual allowance is £60,000.

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