The Annual Investment Allowance explained

What is the Annual Investment Allowance?

The AIA is a type of capital allowance. Capital allowances are a tax relief that lets a business deduct some or all of the value of an item from its profits before it pays tax. If a business sells an item after claiming the AIA on it, it may need to pay tax.

It is a relief for buying business equipment, not an allowance on investment income such as savings or shares. Business cars do not qualify, and capital allowances on cars work differently.

How much is the AIA?

The AIA amount is £1 million. For limited companies and for sole traders and partnerships, that level has applied from 1 January 2019. ^[1]

You get a new allowance for each accounting period. If an accounting period is more or less than 12 months, the amount is adjusted. For example, in a 9-month period the AIA is 9/12 of £1,000,000, which is £750,000.

If two or more limited companies are controlled by the same person, they get one AIA between them and can choose how to share it.

What can be claimed under the AIA?

Most plant and machinery qualifies, up to the AIA amount. Plant and machinery means items kept for use in the business, such as equipment and machinery, and it includes vans, lorries and other business vehicles. Some fixtures and parts of a building considered integral, called integral features, can also count. ^[2]

What assets do not qualify for the AIA?

The AIA cannot be claimed on:

• business cars
• items owned for another reason before they started being used in the business
• items given to the business

More generally, plant and machinery allowances cannot be claimed on things that are leased unless there is a hire purchase contract or long funding lease, items used only for business entertainment, land, structures, or buildings themselves. ^[2]

Cars have their own rules. They do not qualify for the AIA, and writing down allowances are used instead, except that a car with zero CO2 emissions may qualify for a 100% first-year allowance. ^[3] Motorcycles, lorries, vans and trucks do not count as cars for this purpose, so the AIA can be claimed on them.

When can the AIA be claimed?

The AIA can only be claimed in the accounting period in which the item was bought.

The date of purchase is the date the contract was signed if payment is due in less than 4 months, or the date payment is due if that is more than 4 months later. For items bought under a hire purchase contract, the business can claim all the payments it will make under the contract from when it starts using the item, but not the interest.

What if spending is above the AIA, or I do not want to claim the full cost?

On any amount above the AIA, the business can claim first-year allowances or writing down allowances. If a single item takes the total over the limit, its value can be split between the types of allowance.

A business that prefers not to claim the full cost, for example because it has low profits, can claim writing down allowances instead, or part of the cost as AIA and part as writing down allowances.

The other allowances for plant and machinery include 100% first-year allowances, full expensing and a 50% first-year allowance for purchases from 1 April 2023, a 40% first-year allowance for qualifying purchases from 1 January 2026, and writing down allowances. If an item qualifies for more than one allowance, the business can choose which to use. ^[4]

How is the AIA claimed?

A limited company claims on its Company Tax Return and has to include a separate capital allowances calculation. ^[5] The claim has to be made in the accounting period the item was bought for the AIA and for the first-year allowances.

The detail of which allowance is best, and how the pools work, depends on the assets the company bought and its profits. A specialist can look at the company's own purchases.