Annual Investment Allowance (AIA) 2026/27: Complete £1 Million Guide

What is the AIA?

The Annual Investment Allowance (AIA) is a capital allowance that gives businesses a 100% tax deduction on qualifying expenditure on plant and machinery in the year it is incurred. Rather than spreading the tax relief over many years through writing down allowances, the AIA allows the full cost to be deducted immediately against trading profits. For a company paying 25% corporation tax, £100,000 of AIA-eligible expenditure generates £25,000 in tax savings in the same year.

The AIA limit was permanently set at £1 million from 1 April 2023. Previously, the limit had fluctuated — sometimes as low as £25,000 — but Parliament decided to set a permanent high limit to provide certainty for business investment planning. The £1 million limit is per business entity and is not restricted to any particular industry or type of business.

AIA is available to sole traders, partnerships, and limited companies. It applies to expenditure on plant and machinery that is used wholly or partly in the trade. Where an asset is used partly for private purposes, the AIA is restricted in proportion to business use. For most businesses spending under £1 million per year on equipment, the AIA is the primary capital allowances tool.

What Qualifies for AIA

Plant and machinery is a wide category that encompasses most moveable business assets and many fixed assets. Manufacturing equipment, factory machinery, tools, lathes, presses, CNC machines, and production lines all qualify. So do computers, servers, network equipment, office furniture, shop fittings, CCTV, and security systems.

Commercial vehicles — vans, lorries, tractors, forklifts, and other non-car vehicles — qualify for AIA. Scaffolding used in a business, scaffolding platforms, cranes, and lifting equipment also qualify. Assets that are fixed to land but are not part of the structure of a building (such as moveable partitions) qualify, as do fixtures that are not integral features.

Importantly, integral features of buildings qualify for AIA despite being embedded in the fabric of a building. Integral features include electrical systems (including lighting), cold water systems, space heating and ventilation systems, hot water systems, lifts and escalators, and external solar shading. This makes AIA particularly valuable for businesses fitting out offices or industrial units.

AIA can be claimed on both new and second-hand assets. The asset does not need to be brand new — a used piece of equipment purchased by the business qualifies in the same way as a new one.

What Does Not Qualify

Cars are the most significant exclusion from AIA. A car is defined by reference to the road vehicle emissions and type — broadly, a vehicle suitable for the carriage of no more than eight passengers. Commercial vans, taxis (over 8 passengers), and vehicles not used on public roads generally escape this definition. Cars are allocated to the main pool (18% WDA per year) if emissions are 50g/km or below, or the special rate pool (6% WDA) if above 50g/km, or qualify for 100% First Year Allowance if zero-emission.

Land does not qualify for AIA or any capital allowance — land has no depreciation for tax purposes. Buildings, structures and permanent assets embedded in land do not qualify as plant and machinery (though some embedded assets such as integral features do). Agricultural structures, dwelling houses, and hotels fall under the Structures and Buildings Allowance (SBA at 3% per year) rather than AIA.

Assets that are leased out by the business to others (where the business is the lessor) are excluded from AIA — the standard WDAs apply instead. This prevents leasing companies from claiming 100% immediate relief on assets they own but do not themselves use. Assets provided under hire purchase contracts where the business is the hirer do qualify, once the asset is in use.

AIA Timing Strategies

For businesses spending close to or above £1 million per year on qualifying assets, timing of expenditure can significantly affect the tax outcome. The £1 million limit is per accounting period, so splitting purchases between two accounting periods can double the available AIA. A business with a 31 December year-end that needs £1.5 million of equipment can buy £1 million before 31 December (using the full AIA for that year) and the remaining £500,000 in January (using the fresh AIA for the next year).

Conversely, accelerating a planned purchase into the current accounting period can pull forward significant tax relief — useful if a business wants to reduce its current year tax liability. The cash flow benefit of claiming AIA in year one rather than over several years via WDAs is material, particularly at the 25% corporation tax rate.

For accounting periods shorter than 12 months, the AIA is pro-rated. A 9-month accounting period gives a maximum AIA of £750,000. New businesses whose first accounting period runs from, say, 1 July to 31 December (6 months) have a £500,000 AIA for that period. This is worth considering when incorporating or changing a year-end.

AIA for Groups and Partnerships

Connected companies — those under common control — must share a single £1 million AIA between them. HMRC defines connection broadly, following the CTA 2010 s1122 connected persons test. Two companies owned by the same individual (or family members acting together) are connected and must share one AIA. The companies can agree between themselves how to allocate the AIA, but the combined claim cannot exceed £1 million.

This rule is intended to prevent the straightforward multiplication of AIA through incorporation of multiple companies. A sole trader who incorporates two separate companies still has only £1 million total AIA. Groups planning significant capital investment should model the allocation carefully — where one company has large capital expenditure and another has little, allocating the full AIA to the high-spending company is most efficient.

For partnerships, the AIA belongs to the partnership as a whole (not to individual partners). A trading partnership with three partners has one £1 million AIA for the partnership's qualifying expenditure. If a partner also runs a sole trader business, that sole trader business has its own separate AIA — the partnership and the sole trader business are separate entities for AIA purposes.

Writing Down Allowances as the Fallback

For expenditure that exceeds the £1 million AIA, or for assets excluded from AIA (such as cars), capital allowances are given through the pool system with annual writing down allowances.

The main pool attracts 18% WDA per year on a reducing balance basis. This pool includes general plant and machinery not allocated elsewhere. A £100,000 asset in the main pool generates £18,000 of relief in year one, £14,760 in year two, and so on — it takes many years to obtain the majority of the relief. Electric cars with CO2 emissions of 0g/km qualify for the 100% First Year Allowance (FYA) rather than the pool.

The special rate pool attracts 6% WDA per year. This pool includes integral features of buildings, long-life assets (those expected to have a useful economic life of at least 25 years), thermal insulation of existing buildings, and cars with CO2 emissions above 50g/km. The 6% rate makes the tax cost of large special rate pool assets very slow to recover — AIA on integral features is therefore particularly valuable, moving assets from a 6% WDA to 100% in-year relief.

A small pools allowance of £1,000 allows a pool with a tax written-down value of £1,000 or less to be written off in full, avoiding the administrative burden of maintaining tiny balancing pools indefinitely.

Disposal and Balancing Charges

When a business sells or disposes of plant and machinery, the sale proceeds are deducted from the relevant pool's tax written-down value (TWDV). If a pool TWDV is reduced to nil or below zero by disposal proceeds, a balancing charge arises — the negative amount is added back to taxable profits in that period. This effectively claws back some of the capital allowances previously claimed.

The risk is most acute for assets on which AIA was claimed in full. If a £200,000 machine was claimed under AIA (reducing the pool TWDV to zero) and is later sold for £80,000, the £80,000 disposal proceeds create a pool balance of negative £80,000 — resulting in a £80,000 balancing charge, taxable at 25% corporation tax (£20,000 additional tax). The original AIA gave £50,000 relief; the disposal partially claws it back.

For businesses that regularly buy and sell high-value assets, it may be more efficient to place assets in a pool and claim WDAs rather than using AIA, if a significant disposal is expected in the near term. The pool absorbs both the purchase and the disposal, with the WDA continuing on the net balance. This avoids balancing charges. However, for most businesses the time value of claiming AIA now outweighs the future disposal risk.