Annual Investment Allowance 2026/27: How Small Businesses Claim 100% Tax Relief on Equipment

What the Annual Investment Allowance Does

Normally, when a business buys equipment, it can't simply deduct the full cost from profits in one go — capital expenditure is treated differently from day-to-day running costs. Standard capital allowances spread relief over several years using writing-down allowances (typically 18% per year for the main pool, on a reducing balance).

The Annual Investment Allowance changes this for most qualifying purchases: it allows the entire cost to be deducted from taxable profits in the same accounting period the equipment is bought, up to an annual limit of £1 million. This front-loads the tax benefit, which matters for cash flow — you get the tax saving now, not spread thinly over a decade.

What Qualifies

Cars are the classic exception that catches people out — even a car used wholly for business doesn't qualify for the AIA. Instead, cars fall under separate capital allowance rules, with the rate depending on the vehicle's CO2 emissions.

Worked Example

A small limited company buys £15,000 of new machinery in the 2026/27 accounting period.

Without the AIA, the company would only get a fraction of that relief in year one via standard writing-down allowances (18% of £15,000 = £2,700 relief in year one, with the remainder spread over subsequent years).

How It Interacts With Corporation Tax Rates in 2026/27

Corporation Tax in 2026/27 remains structured as:

Because the AIA directly reduces taxable profit, the value of the relief depends on the company's marginal rate — a company already in marginal relief territory could see the AIA claim effectively taxed at a rate higher than 25% at the margin (marginal relief fraction of 3/200 applies within the £50,000–£250,000 band), so the actual cash saving from an AIA claim can vary. Get advice from an accountant when planning large purchases near these thresholds.

Sole Traders and Partnerships

The AIA isn't just for limited companies. Sole traders and partnerships made up of individuals can claim it too, and the benefit flows through to:

• Income Tax — reduced taxable trading profit
• Class 4 National Insurance — reduced profit also reduces Class 4 NI liability (6% between the lower and upper profits limits, 2% above, in 2026/27)

For a self-employed person in the higher rate tax band, a £10,000 qualifying purchase could reduce their combined Income Tax and Class 4 NI bill by roughly £4,600 (40% Income Tax + 6% Class 4 NI, though the exact figure depends on where the deduction falls relative to their tax bands).

Timing Your Purchases

Because the AIA operates within an accounting period, timing large equipment purchases can matter:

• Buying just before your accounting year-end brings the tax relief forward by a full year compared with buying just after
• If you expect a particularly profitable year, bringing planned equipment purchases into that year maximises the value of the deduction against higher-rate profits
• Conversely, in a loss-making year, capital allowances may create or increase a loss that can be carried back or forward — discuss the options with an accountant, as loss relief rules are more complex than straightforward profit reduction

Practical Steps

1. Keep clear records and invoices for all qualifying equipment purchases, dated within the relevant accounting period.
2. Confirm with your accountant whether specific items (particularly building fixtures or leased assets) qualify — rules have exceptions.
3. If your business is approaching the marginal relief band (£50,000–£250,000 profit), model the AIA claim's effect on your marginal Corporation Tax rate before finalising large purchases.
4. Don't forget cars are excluded — check separate capital allowance rates for business vehicles instead.