Annual Investment Allowance (AIA) 2026/27: Full £1 Million Relief Explained
The AIA gives immediate 100% tax relief on up to £1 million of qualifying plant and machinery spending per year. Learn what qualifies, timing strategies, and writing-down allowances.
The Annual Investment Allowance is one of the most powerful capital expenditure incentives available to UK businesses. By allowing 100% of the purchase cost of qualifying assets to be deducted from taxable profits in the year of purchase, it eliminates the need to spread relief over many years through the writing-down allowance system. With the limit permanently set at £1,000,000 from April 2023, the vast majority of UK businesses -- sole traders, partnerships, and companies alike -- can invest up to £1 million in plant and machinery each year and receive full tax relief immediately.
What is the Annual Investment Allowance?
The AIA was introduced in 2008 to replace the first-year allowance for most plant and machinery. It gives businesses a 100% deduction in the year of expenditure, effectively providing the same tax relief as expensing capital items through the profit and loss account.
Without AIA (or full expensing), plant and machinery is added to a capital allowances pool and attracts writing-down allowance at only 18% or 6% per year on a reducing balance basis. For a £100,000 machine:
- With AIA: £100,000 deducted in year 1. Full tax saving (at 25% corporation tax = £25,000) in year 1.
- Without AIA (18% WDA): Year 1 relief: £18,000; Year 2: £14,760; Year 3: £12,103... relief spread over 15+ years.
The time value of money makes upfront relief significantly more valuable than relief spread over years.
What qualifies for AIA?
Qualifying plant and machinery includes:
- Manufacturing and processing equipment.
- Office equipment: computers, printers, servers, desks, chairs.
- Commercial vehicles: vans, trucks, forklift trucks, tractors.
- Commercial premises fixtures: shelving, counters, display units.
- Integral features: electrical systems, heating and cooling, water systems, lifts.
- Construction equipment and tools.
- Agricultural machinery.
Excluded from AIA:
- Cars (specifically defined -- a vehicle primarily suited to the private conveyance of people; goods vehicles are not cars for this purpose).
- Assets used in a ring-fence oil and gas trade.
- Assets acquired under finance leases where the lessor (not the user) claims allowances.
- Assets gifted to the business by the owner from personal use -- these go straight into the pool at market value and are not eligible for AIA.
The special rate pool and integral features
Some assets qualify for capital allowances but at the slower 6% special rate rather than the 18% main pool rate. These include:
- Long-life assets (assets with an expected life of 25 years or more when new).
- Integral features of buildings.
- Thermal insulation of existing buildings.
However, AIA can be claimed on integral features just as it can on main pool assets. This is particularly valuable because without AIA, an electrical system installed in a commercial building would only receive 6% relief per year -- a very slow write-down. By claiming AIA first, you use the £1 million limit to get 100% relief on integral features before moving to lower-priority main pool assets.
Recommended order when expenditure includes both pools: Apply AIA to special rate pool assets first (where the WDA rate is lowest), then to main pool assets. The tax benefit of AIA is greatest where it avoids the 6% special rate WDA.
The writing-down allowance as fallback
Where qualifying expenditure exceeds the £1 million AIA limit, the excess joins the relevant pool and receives WDA:
- Main pool: 18% per year on the reducing balance. Used for most plant and machinery, integral features that have used up AIA, etc.
- Special rate pool: 6% per year. Used for long-life assets, integral features not covered by AIA.
- Single asset pools: Used for assets with mixed business/private use, or assets that will leave the pool on disposal.
A business spending £1.5 million on qualifying assets (all main pool) in 2026/27 would claim £1 million under AIA (100% relief) and add £500,000 to the main pool (receiving £90,000 WDA at 18% in year 1, and continuing at 18% on the reducing balance thereafter).
Connected businesses and the shared AIA
The AIA is not a per-business allowance that automatically multiplies if you own multiple businesses. Where businesses are under common control (a concept defined in the capital allowances legislation), they must share a single £1 million AIA between them.
Common situations where sharing applies:
- A sole trader also operates a limited company in the same or a related trade.
- Two companies are both controlled by the same individual or group.
- Partnerships where a partner also has their own company in a related trade.
Groups of companies under common ownership share one AIA. Planning the allocation of the shared AIA across group entities is important where combined qualifying expenditure approaches or exceeds £1 million.
Timing strategies for capital expenditure
The AIA is annual -- it does not carry forward. If a business fails to use its AIA in a given year, the unused portion is lost.
Key timing considerations:
- Year-end proximity: Expenditure incurred in the final days of an accounting period still qualifies for AIA in that period. Conversely, expenditure incurred on day 1 of the new period uses the new year's AIA.
- Accelerating expenditure: If you anticipate a high-profit year followed by a lower-profit year, it may be worth accelerating qualifying expenditure into the high-profit year to maximise the tax value of the relief.
- Deferring expenditure: Conversely, if the current year's AIA has already been exhausted, deferring further qualifying expenditure to the next period preserves access to a fresh £1 million AIA.
- Deposit vs delivery: AIA is generally available from the date the item is brought into use, not the date the order or deposit is placed. Plan accordingly.
Full expensing vs AIA: which to use?
Since April 2023, companies have access to both AIA and full expensing. The practical differences:
| Feature | AIA | Full expensing |
|---|---|---|
| Applies to | Companies, sole traders, partnerships | Companies only |
| Asset condition | New or second-hand | New only |
| Annual limit | £1,000,000 | Unlimited |
| Special rate pool | Yes (6% assets get AIA) | Separate 50% FYA for special rate |
For most SME companies, AIA and full expensing produce the same result on assets within the £1 million limit. Full expensing becomes relevant when qualifying expenditure exceeds £1 million -- it removes the cap for companies with large capex programmes.
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What is the Annual Investment Allowance?
The Annual Investment Allowance (AIA) is a capital allowance that gives immediate 100% tax relief on qualifying expenditure on plant and machinery. Businesses can deduct the full cost of qualifying assets from their taxable profits in the year of purchase, up to a limit of £1,000,000. The AIA has been permanently set at £1 million since April 2023.
What qualifies for AIA?
AIA applies to most plant and machinery used in a business -- including manufacturing equipment, office furniture, computers, commercial vehicles (vans, lorries), and integral features of buildings (such as electrical systems, heating and cooling systems, and lifts). Excluded items include cars, items used for leasing, and items given to the business by the owner personally.
Do cars qualify for AIA?
No. Cars are specifically excluded from AIA. Cars qualify for a writing-down allowance (WDA) instead -- 18% per year in the main pool (for cars with CO2 emissions of 50g/km or below) or 6% per year in the special rate pool (for cars with CO2 above 50g/km). Fully electric cars with zero emissions qualify for 100% first-year allowances as long as this incentive remains in place.
What is the writing-down allowance (WDA) if expenditure exceeds the AIA?
If plant and machinery spending exceeds the AIA limit, the excess is added to the relevant pool and attracts writing-down allowance at 18% per year (main pool) or 6% per year (special rate pool for long-life assets and integral features). WDA is calculated on the reducing balance, so the tax relief is spread over many years rather than received upfront.
What are integral features for AIA purposes?
Integral features are fixed plant and machinery within buildings that qualify for capital allowances but at the 6% special rate (not 18%). They include: electrical systems, cold water systems, heating and ventilation systems, lifts and escalators, and external solar shading. They do qualify for AIA (not just the 6% WDA), so it is important to claim AIA on integral features before the limit is reached.
Is the AIA shared between connected businesses?
Yes. If two or more businesses are under common control (for example, a sole trader and their company, or two commonly owned companies), they share a single AIA between them. Each business cannot claim a full £1 million independently -- the combined AIA limit is £1 million across all connected businesses.
How does the AIA apply in a short or long accounting period?
If the accounting period is less than 12 months, the AIA limit is proportionally reduced. For a 9-month period, the AIA limit is £750,000 (9/12 x £1,000,000). If the accounting period spans a change in the AIA limit, a blended calculation applies. Always check the pro-rated limit for non-standard periods.
What is 'full expensing' and how does it relate to AIA?
Full expensing is a 100% first-year allowance for new (not second-hand) qualifying main pool and special rate pool assets purchased by incorporated companies. It was introduced from 1 April 2023 alongside the permanent £1 million AIA. Full expensing gives the same 100% upfront relief as AIA but is only available to companies, not sole traders or partnerships. AIA applies to both incorporated and unincorporated businesses.
What is the optimal strategy for timing capital expenditure?
To maximise AIA relief, it is generally better to incur qualifying expenditure early in the accounting period rather than late. This is because AIA is available from the date of purchase, not year-end. Spending £1 million in month 1 gives full first-year relief; spending it in month 12 gives relief in the same year but only if the year-end has not yet passed. Avoiding expenditure that spans a year-end change in AIA limits is also important.
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