Annual Investment Allowance (AIA) 2026/27: 100% Tax Relief on Equipment
The Annual Investment Allowance lets most businesses deduct the full cost of qualifying equipment against profits in the year of purchase, up to £1 million. Here's how it works, what qualifies, and how it compares with ordinary capital allowances.
How AIA Works
Self-Employed Tax Calculator
Calculate income tax, Class 2 and Class 4 National Insurance for self-employed and sole traders for 2025/26.
Self-employed tax calculator| Feature | Detail |
|---|---|
| Annual limit | £1,000,000 (permanent since January 2019) |
| Who can claim | Sole traders, partnerships (without corporate partners), limited companies |
| What qualifies | Most plant and machinery, tools, vans, office equipment |
| What's excluded | Cars (separate CO2-based rules apply) |
| Deduction timing | 100% in the accounting period of purchase, up to the limit |
Worked Example: £45,000 Equipment Purchase
| Scenario | Without AIA (writing-down allowance, illustrative 18%) | With AIA |
|---|---|---|
| Year 1 deduction | £8,100 (18% of £45,000) | £45,000 (100%, within the £1m limit) |
| Tax saved in year 1 (basic rate, 20%) | £1,620 | £9,000 |
| Remaining balance for future years | £36,900, depreciating further each year | £0 — fully relieved already |
AIA brings forward the tax benefit of a purchase into the year it's actually made, rather than spreading it thinly over many years — a significant cash-flow advantage for businesses making meaningful equipment investments.
AIA vs Full Expensing
| AIA | Full Expensing | |
|---|---|---|
| Who can claim | Sole traders, partnerships, companies | Limited companies only |
| Annual limit | £1 million | No overall cap (applies to qualifying new/unused main-rate plant and machinery) |
| Typical relevance | Covers the vast majority of small and medium business capital spending | Becomes relevant once spending exceeds the £1 million AIA limit |
For most smaller businesses, capital spending sits comfortably within the £1 million AIA limit, making full expensing largely academic — it's primarily a consideration for larger companies with substantial capital investment programmes.
Full expensing capital allowances guideTiming Purchases for Maximum Benefit
Because AIA applies within a specific accounting period, deliberately timing a large equipment purchase to fall within a higher-profit year can maximise the immediate tax saving, compared with the same purchase falling in a lower-profit year where the deduction has less impact on your tax bill for that year. This is a common piece of practical tax planning for businesses with some flexibility over when to invest in new equipment.
What Happens Above the £1 Million Limit
Expenditure exceeding £1 million in qualifying purchases within an accounting period doesn't lose its tax relief entirely — it simply falls into the ordinary capital allowances pools, relieved gradually via writing-down allowances (commonly at 18% for the main pool, 6% for the special rate pool, on a reducing balance basis) rather than all at once, or potentially via full expensing for an eligible limited company on qualifying new assets.
Frequently asked questions
Related reading
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