Annual Investment Allowance UK 2026: GBP 1m Write-Off for Small Businesses

If your business spends money on equipment, machinery, or other qualifying assets, the Annual Investment Allowance (AIA) is one of the most powerful tax reliefs available. From April 2023, the AIA was made permanently fixed at GBP 1,000,000 per year -- a significant upgrade from the earlier temporary limits -- and that permanent GBP 1m cap continues into 2026/27. For most small and medium-sized businesses, this means you can write off the full cost of qualifying capital purchases in the year you buy them, rather than spreading deductions over many years.

What Is the Annual Investment Allowance?

The AIA is a form of capital allowance. When a business buys a capital asset, HMRC generally requires you to claim relief over time through a writing-down allowance (WDA) -- typically 18% per year on a declining balance for main pool assets, or 6% for special rate assets. The AIA lets you skip that slow process and deduct the entire cost in year one, reducing your taxable profits immediately.

The permanent limit is GBP 1,000,000 per tax year (or accounting period). Spend GBP 1m on qualifying plant and machinery, and you deduct the full GBP 1m from profits before calculating your Corporation Tax or income tax liability.

What Qualifies for AIA?

AIA covers "plant and machinery" -- a broad category that includes:

• Machinery, tools, and equipment used in your trade
• Computers, servers, and technology hardware
• Shelving, racking, and storage systems
• Vans, lorries, and other commercial vehicles (not cars -- see below)
• Fixtures and fittings within a business property
• Heating, ventilation, and air conditioning systems
• Solar panels and other energy-saving equipment
• Agricultural equipment and farm machinery

The key test is whether the asset is used for business purposes. An asset that is partly personal and partly business can qualify only for the business-use portion.

What Does NOT Qualify for AIA?

Several categories are explicitly excluded:

Cars. This is the most common exclusion that catches business owners out. A car -- defined as a vehicle suitable for private use -- cannot be claimed under AIA regardless of cost. Instead, cars qualify for WDA at 18% (low emission) or 6% (higher emission), or a 100% first-year allowance if the car is zero-emission. Vans and commercial vehicles are fine for AIA; cars are not.

Land and buildings. The cost of purchasing land or a building itself does not qualify (though fixtures within a building often do, and there is a separate Structures and Buildings Allowance for construction costs).

Assets bought for leasing. If you purchase an asset primarily to lease it out to others, AIA generally does not apply.

Assets already owned and introduced to the business. If you owned an asset personally and transfer it into your business, you cannot claim AIA on it.

Connected party transactions at above market value. Purchases from connected persons above market value are restricted.

Partial-Year Periods and Accounting Period Rules

AIA is calculated per accounting period, not per calendar year. If your accounting period is shorter than 12 months -- for example, when you start a business or change your year end -- your AIA limit is reduced proportionally.

For a six-month accounting period, your AIA cap is GBP 500,000 (GBP 1m x 6/12). For a three-month period, it is GBP 250,000. This matters if you are planning a large capital purchase: if your accounting period ends soon, buying just after the new period starts gives you the full year's limit.

When two or more businesses are under common control (related companies or a company and its partners), they may share a single GBP 1m AIA between them. Groups and connected businesses should plan purchases carefully to avoid exceeding the shared limit.

AIA and Corporation Tax: The Numbers

Say your company has taxable profits of GBP 150,000 and you spend GBP 80,000 on qualifying machinery. With AIA, your taxable profits fall to GBP 70,000. At the 19% Corporation Tax rate (profits up to GBP 50,000 attract 19%; marginal relief applies between GBP 50,000 and GBP 250,000; above GBP 250,000 the full rate is 25%), this produces a meaningful tax saving compared with claiming only 18% WDA in year one.

For a sole trader or partnership, AIA works the same way but reduces income subject to Income Tax and Class 4 National Insurance, which can be worth up to 47% combined relief for a higher-rate taxpayer.

Timing Your Purchases

Because AIA gives full relief in the year of purchase, timing matters. If you have had a particularly profitable year, bringing forward a planned equipment purchase to fall within that accounting period can reduce your tax bill significantly. Equally, if profits are low this year but expected to rise next year, it can be worth delaying a purchase to use the AIA in the higher-profit period.

If your total qualifying spend exceeds GBP 1m in a year, the excess is claimed through WDA in the usual way -- 18% or 6% on the appropriate pool.

Claiming AIA on Your Return

For companies, AIA is claimed on the CT600 return. For sole traders and partnerships, it appears on the Self Assessment tax return under capital allowances. Keeping good records of purchase invoices and the business purpose of each asset is essential in case HMRC queries the claim.

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Use the CalcHub Corporation Tax calculator to model how a capital investment under AIA will reduce your business tax bill this year.