What is the Annual Investment Allowance & How Do You Claim It?

The Annual Investment Allowance (AIA) gives UK businesses 100% tax relief on qualifying plant and machinery in the year you incur the expenditure , up to £1 million per accounting period. It is open to sole traders, partnerships, and limited companies, and covers most equipment, machinery, integral features, and fixtures but not cars, land, or the building structure itself. 

Who Can Claim the Annual Investment Allowance? 

Sole traders, partnerships of individuals, LLPs, and limited companies can all claim AIA, as long as the asset is used in the business. For sole traders and partnerships it reduces income tax. For companies it reduces corporation tax. 

Two groups often assume they qualify when they don't. The first is mixed partnerships, meaning any partnership that has a company as one of its members. These cannot claim AIA at all, because the allowance is only available where every partner is an individual. The second is businesses using the cash basis, which can claim capital allowances on cars only and simply treat other equipment as a running cost. Trusts are also excluded. 

One point is worth acting on early. Once your accounting period closes, the allowance for that period is gone and cannot be reinstated, so it pays to confirm your structure qualifies before you commit to a large purchase. 

• Can claim: sole traders, partnerships of individuals, LLPs, and limited companies. 
• Cannot claim: mixed partnerships, trusts, and cash-basis businesses (other than on cars). 

What Qualifies for the Annual Investment Allowance? 

AIA covers most plant and machinery, meaning the tools, equipment, and fixtures a business uses to operate. Typical qualifying items are machinery, computers and IT equipment, office furniture, tools, and commercial vehicles such as vans and lorries. It also applies to fixtures installed in a commercial building and to its integral features, which include electrical and lighting systems, heating, ventilation, air-conditioning, cold-water systems, and lifts. Integral features would ordinarily attract only the special rate writing-down allowance, but AIA can be claimed against them instead up to the £1 million limit, giving full relief in the year of expenditure. 

Several things never qualify. Cars are excluded and have their own emissions-based regime. Land and the building structure itself fall outside AIA, as do leased assets unless held on hire purchase or a long funding lease, and anything bought solely for business entertainment. Residential property is also excluded. Holiday-let properties were the one exception under the Furnished Holiday Lettings rules, but that regime ended in April 2025, so no new claims arise there though transitional provisions may apply to expenditure incurred before abolition.

How VAT Affects Annual Investment Allowance (AIA)

If your business is VAT-registered and can claim the VAT back on a purchase, you work out AIA on the price without the VAT. If you cannot claim the VAT back, for example because you are not VAT-registered, you work out AIA on the full price including VAT. 

Qualifies:  Machinery, equipment, computers, office furniture, tools, vans and lorries, fixtures, and integral features such as wiring, lighting, heating, ventilation, air conditioning, cold water systems, and lifts. 

Does not qualify: Cars, land, the building itself, leased items (unless on hire purchase or a long funding lease), anything bought purely for business entertainment, and residential property. 

How the £1 Million AIA Limit Works 

The AIA limit is £1 million for each 12-month accounting period, and it is now permanent. Each business gets one allowance per period, no matter how many assets it buys. 

If your accounting period is shorter than 12 months, the allowance shrinks in proportion. Take £1 million, multiply by the number of months in the period, and divide by twelve. This catches a lot of new businesses in their first year and anyone who changes their year-end. 

The £1 million is not always one allowance each. Companies in the same 51% group share a single allowance, and so do companies or businesses controlled by the same person where they share premises or do similar work. They can split the allowance however they like, but they cannot multiply it. 

You also do not have to claim the full amount. In a low-profit year it can pay to claim just enough to bring your profit down to where you want it, then leave the rest in the pool to be written down in later years when profits, and the tax saved, are higher. 

Which Tax Relief Applies: AIA, Full Expensing or 40%?

Since January 2026 there are three fast reliefs to weigh up, and for many businesses the best answer is a mix of them. The table shows who can use each, and on what.

Full expensing gives companies unlimited 100% relief on new main-rate plant, and it is now permanent. The new 40% first-year allowance fills the gaps it leaves. It runs since 1 January 2026 for companies and 6 April 2026 for sole traders and partnerships, it is open to unincorporated businesses, and it covers assets bought for leasing within the UK. It applies only to new and unused main-rate plant, so cars, second-hand assets, and special-rate items do not qualify. 

For most businesses the sensible order is to use AIA first, since it gives 100% relief on both new and second-hand assets up to £1 million. Then cover any remaining new main rate spend with full expensing if you are a company, or with the 40% allowance if you are not. The main-pool writing-down rate drops from 18% to 14% in April 2026, so letting relief sit in the pool now costs you more. That makes claiming AIA in the year you spend on amounts above the cap as well as below it, more valuable than before.

How Annual Investment Allowance Works for Commercial Property

For property investors, Annual Investment Allowance applies to the plant and machinery inside a commercial property, never to the land, the building structure, or a residential dwelling. What qualifies are the fixtures and integral features: heating, electrical and lighting systems, air conditioning, lifts, sanitaryware, and similar items built into the property, along with any loose plant used in the business. 

The trap most buyers fall into sits in the purchase itself. When you buy a commercial property that contains fixtures, you and the seller must jointly agree the value placed on those fixtures and record it in a Section 198 election, submitted within two years of completion. Two things have to line up: the seller must have brought the fixtures into their capital allowances pool, and the agreed value must be fixed in the election. If either is missing, your claim defaults to nil, and the relief is gone for good rather than simply delayed. On a purchase worth several hundred thousand pounds, that can mean tens of thousands of pounds in tax relief lost. 

This is why a capital allowances review earns its fee. Pinpointing the qualifying fixtures, agreeing the figure with the seller, and claiming the right allowance against them is specialist work, and the two-year window does not forgive a late start. We explain how the election works in our Section 198 election guide.

How to Claim AIA Tax Relief

You claim AIA on the tax return for the accounting period in which you bought the asset, not a later year. How you claim depends on your structure: sole traders use the self-employment pages of their Self-Assessment return, partnerships use the partnership return with allowances passing through to each partner, and companies claim on the CT600 with a capital allowances calculation. 

For assets acquired under a contract, the date of expenditure for capital allowances purposes is the date on which the obligation to pay becomes unconditional (typically the date of delivery or when work is certified), provided payment is due within four months. If payment is due more than four months after the obligation to pay becomes unconditional, the date of expenditure is the date payment falls due For anything bought on hire purchase, you can claim AIA on the full cost once the asset is in use, but the interest is never claimable. 

Keep purchase invoices showing the date of purchase, the supplier, and the amount paid. Companies must retain these records for six years from the end of the accounting period. Sole traders must keep them for five years from the 31 January Self Assessment filing deadline for the relevant tax year. HMRC can open an enquiry into a return within those windows, and without documentary evidence the claim is at risk. 

If you are a sole trader or landlord, Making Tax Digital may change how you report. Since April 2026, those with qualifying income over £50,000 must keep digital records and send quarterly updates, with the threshold falling in later years. The quarterly updates cover income and expenses only, so AIA is still claimed at the year-end rather than in them. Check the current thresholds and timing for your situation, as the rules are being phased in. Here is the complete guide of MTD 

Timing Your AIA Claim: Planning Points for 2025/26 

When you buy can affect when you get the relief. A purchase made just before your year-end is generally relieved a year sooner than the same purchase made just after it, so if you are planning to buy anyway, the timing is worth thinking about. 

If your spending is close to the £1 million limit, spreading a large purchase across two accounting periods may let you use a separate allowance in each, rather than going over the limit in a single period. 

There is also a reason not to leave things too late. Since April 2026, the rate at which spending above the limit is relieved is due to fall, which can make claiming relief in the year you spend more valuable than deferring it. If your spending goes above £1 million on new equipment, companies may be able to claim the balance through full expensing, and sole traders and partnerships through the new 40% first-year allowance, subject to the conditions for each. 

In a lower-profit year, it may not be worth claiming the full AIA. Claiming only as much as you need and leaving the rest in the pool can sometimes preserve allowances and tax bands for later years. The right approach depends on your own circumstances, so it is best to take advice and treat Annual Investment Allowance as one part of your wider tax planning rather than a decision made in isolation.

Frequently Asked Questions