Glossary

Annual Investment Allowance

Krishna Prasad Dahal, Chartered Accountant

Reviewed by Krishna Prasad Dahal FCCA, ACA (ICAEW), FCA (ICAI India)ICAEW Council Member · Last reviewed

Definition

The Annual Investment Allowance (AIA) is a capital allowance that gives 100% tax relief on qualifying plant and machinery, such as computers, tools, machinery and vans, up to £1 million of spending a year. The whole cost is deducted from profits in the year of purchase. It is the capital allowance most small companies and sole traders use, and business cars do not qualify.

What AIA does not cover

AIA cannot be claimed on:

  • business cars, which get writing down allowances or, if new and zero-emission, a 100% first-year allowance
  • items the business owned for another reason before using them in the business
  • items given to the business

Unlike full expensing, AIA does not require the item to be new, so second-hand equipment qualifies.

How the £1 million limit works

Limited companies under the same control get one AIA between them and choose how to share it. The limit is also scaled down for accounting periods shorter than 12 months, so a 9-month period gets £750,000.

A company that spends £40,000 on machinery and £30,000 on a van in a 12-month accounting period can deduct the full £70,000 from that period’s profits, which lowers its taxable total profits and Corporation Tax.

SmartFiling’s guide to cutting the tax bill compares capital allowances and full expensing and when each is worth claiming.

Related questions

  • How can I reduce my company's Corporation Tax legally? Claiming AIA on equipment in the year you buy it is one of the most direct ways.
  • Does AIA apply to cars? No. Cars get writing down allowances, or 100% relief if they are new, zero-emission and bought before April 2027.

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