Annual Investment Allowance
The Annual Investment Allowance lets a company deduct the full cost of qualifying plant and machinery from taxable profit in the year it is bought, up to £1,000,000 a year. It covers most equipment, vans, tools, fixtures and commercial vehicles, but not cars.
Also known as: AIA
How it works
Capital spending is not an ordinary expense. Buying a £9,000 machine does not reduce profit by £9,000 in the accounts in one go, and accounting depreciation is never allowable for tax. Capital allowances replace depreciation, and the Annual Investment Allowance is the most generous of them: it gives an immediate 100% deduction on qualifying spend up to £1,000,000 in a twelve-month period.
Most things a small company buys qualify: computers, tools, machinery, vans, office furniture, integral features in a commercial property, and second-hand as well as new assets. Cars never qualify for the allowance, and neither do buildings, land or anything you lease rather than own. Assets bought under hire purchase can qualify once they are brought into use.
The limit is proportioned for accounting periods shorter or longer than twelve months, and it is shared between companies under common control. Where spend exceeds the limit, the excess goes into a pool and attracts writing down allowances at 18% or 6% a year instead. A company buying new, unused plant may be better claiming full expensing, which has no cap.
Timing matters more than most directors expect. The deduction follows the date of the contractual obligation to pay, not the date the invoice is settled, so a purchase a few days either side of your year end can move the relief by a full twelve months.
Worked example (2026/27)
£40,000 of equipment bought in one year
| Taxable profit before the claim | £90,000 |
|---|---|
| Annual Investment Allowance claimed | −£40,000 |
| Revised taxable profit | £50,000 |
| Corporation tax saved at 19% | £7,600 |
Assumes the spend qualifies in full and the company has no associated companies.
Who this affects
- Trades buying tools, plant or vans, where a single purchase can wipe out most of a year's profit
- Consultancies and agencies kitting out an office or refitting leased premises
- E-commerce sellers buying racking, packing equipment or warehouse fit-out
- Any company with profit just over £50,000, where a claim can move it back into the small profits rate
Common mistakes
- Claiming on a car, which never qualifies however it is used
- Missing that the limit is shared across companies under common control
- Claiming the full limit in a short accounting period instead of proportioning it
- Assuming depreciation in the accounts already gives tax relief
Frequently asked questions
How much is the Annual Investment Allowance?
£1,000,000 of qualifying spend in a twelve-month accounting period, proportioned for shorter or longer periods.
Can I claim it on a car?
No. Cars are excluded. Relief on cars comes through writing down allowances, or 100% first-year allowances on qualifying new zero-emission cars.
What if I spend more than the limit?
The excess goes into the main or special rate pool and attracts writing down allowances at 18% or 6% a year. New unqualified plant may instead qualify for full expensing, which is uncapped.
Does hire purchase count?
Yes, provided the asset has been brought into use in the business. The whole capital cost qualifies, not just the instalments paid in the year.
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Reviewed by Waqas Sagar ACA FCCA FMAAT · Last reviewed 13 September 2026 · Figures for 2026/27 · About our practice
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