The annual investment allowance (AIA) lets businesses deduct the full cost of qualifying plant and machinery from their profits before tax — in the same year they buy it. This article explains how the AIA works, what qualifies, who can claim, and how to get the most from it. It is relevant to sole traders, limited company directors, partnerships, and anyone in trades such as construction or e-commerce who regularly invests in equipment.
- What is the annual investment allowance?
- How much is the AIA in 2025/26?
- What qualifies for the AIA?
- What does not qualify?
- Who can claim the AIA?
- How to claim the annual investment allowance
- AIA vs writing down allowances
- Practical examples
- Tips for making the most of the AIA
- Frequently asked questions
What is the annual investment allowance?
The annual investment allowance is a type of capital allowance. Capital allowances are the mechanism HMRC uses to give businesses tax relief on capital expenditure — that is, money spent on assets rather than day-to-day running costs.
Normally, the cost of a capital asset cannot be deducted from profits in one go. Instead, you deduct a percentage each year through writing down allowances (WDAs), which can take many years to fully recover the cost. The AIA is the exception. It lets you claim 100% of the cost in the year of purchase, up to the annual limit.
This makes a real difference to your tax bill. If your business buys a piece of machinery for £30,000, claiming the AIA means you deduct the full £30,000 from taxable profits straight away rather than spreading that relief over five to ten years.
How much is the AIA in 2025/26?
The current AIA limit is £1,000,000 per year. This limit has been made permanent and applies from 1 January 2022 onwards. In 2025/26, businesses can claim up to £1 million of qualifying plant and machinery expenditure in a single tax year.
For most small and medium-sized businesses, £1 million is more than enough. The limit only becomes a constraint for larger businesses making significant capital investments in a single year.
If your accounting period is shorter or longer than 12 months, the AIA limit is adjusted proportionately. A six-month accounting period gives you a £500,000 limit, for example.
What qualifies for the AIA?
The AIA covers most plant and machinery used in your business. This is a broad category. HMRC does not define plant and machinery in a single list, but the following assets typically qualify:
- Machinery and equipment — lathes, drills, printing presses, manufacturing equipment
- Vehicles used for business purposes — vans, lorries, and most commercial vehicles (cars are excluded — see below)
- Computers, servers, and IT equipment
- Office furniture and fittings
- Tools and specialist equipment
- Agricultural machinery
- Fixtures in commercial buildings — heating systems, air conditioning, electrical installations, fire alarm systems
- Security systems
- Solar panels and certain renewable energy assets
The asset must be bought outright or on hire purchase. If you lease an asset, you cannot claim the AIA — lease payments are treated as a business expense instead.
What does not qualify?
Some assets are specifically excluded from the AIA:
- Cars — passenger cars do not qualify for the AIA regardless of how they are used in the business. Cars go into the capital allowances pool and attract writing down allowances instead. The rate depends on the car’s CO2 emissions.
- Assets acquired in the final period of a business — you cannot claim the AIA on assets bought in the accounting period when you permanently close a business.
- Assets given to you or transferred between connected parties — if a director transfers a personally owned asset into their limited company, the AIA cannot be claimed on that transfer.
- Land — land itself never qualifies for any capital allowances.
- Assets not used for the trade — the asset must have a genuine business purpose.
If your business buys an asset that has both business and personal use, you can still claim the AIA but only on the business-use proportion. This is common for sole traders and freelancers who use equipment partly at home.
Who can claim the AIA?
Most UK businesses can claim the AIA, including:
- Sole traders
- Partnerships (though only one AIA is available per group of related businesses)
- Limited companies
- Limited liability partnerships (LLPs)
If you are a sole trader or in a partnership, the AIA reduces your taxable profits on your self assessment return. If you run a limited company, the AIA reduces the profits subject to corporation tax.
In 2025/26, the corporation tax rate for small companies with profits under £50,000 is 19%. Companies with profits over £250,000 pay 25%. For profits between £50,000 and £250,000, marginal relief applies. The AIA can pull profits down into a lower band, which is worth planning around.
There are restrictions for groups of companies and for businesses with related or connected parties. Only one AIA is available between businesses that are under common control, so you cannot multiply the allowance by splitting one business into several entities.
How to claim the annual investment allowance
You claim the AIA through your tax return. The process differs slightly depending on your business structure.
Sole traders
Claim capital allowances in the self-employment section of your self assessment return. You will need to provide details of the assets purchased and the total AIA claimed. Good bookkeeping throughout the year makes this straightforward — keep receipts, invoices, and records of when each asset was put into use.
Limited companies
Capital allowances are calculated as part of the corporation tax computation and submitted with your annual accounts and CT600 return. The AIA reduces the taxable profit figure before the corporation tax rate is applied.
Timing matters
An asset qualifies for the AIA in the accounting period in which it is purchased — not when you pay for it if those dates differ. If you are on hire purchase, the date the asset comes into use is generally what counts, not when the final payment is made. Get the timing right, especially if you are close to your year end and considering a large purchase.
AIA vs writing down allowances
If you spend more than the AIA limit, or if an asset does not qualify for the AIA, you claim writing down allowances instead. WDAs are claimed on a reducing balance basis each year.
In 2025/26, the main pool WDA rate is 18% per year. The special rate pool — which covers integral features in buildings, long-life assets, and thermal insulation — has a WDA rate of 6% per year. Cars attract either 18% or 6% depending on their CO2 emissions.
The difference is significant. On a £50,000 asset in the main pool, an 18% WDA gives you £9,000 of relief in year one. The AIA gives you the full £50,000 in year one. The cash flow difference can be substantial, which matters particularly for growing businesses. For a detailed view of how capital spending affects your finances, cash flow planning is worth considering alongside your tax position.
From April 2023, a full expensing regime was introduced for companies, allowing 100% first-year allowances on qualifying main pool plant and machinery. This works alongside the AIA and is particularly useful for companies spending over the £1 million AIA limit. Full expensing does not apply to sole traders or partnerships — they continue to rely on the AIA and WDAs.
Practical examples
Example 1: Sole trader buying a van
A self-employed plumber buys a new van for £28,000 in 2025/26. The van is used exclusively for work. He claims the AIA and deducts the full £28,000 from his taxable profits. If his profits before the deduction were £60,000, the AIA brings his taxable profit down to £32,000. The taxable amount above the personal allowance of £12,570 falls entirely within the basic rate band, meaning tax is payable at 20% on £19,430 — a significant saving compared with his pre-allowance position.
Example 2: Limited company buying equipment
A manufacturing company with profits of £180,000 buys CNC machinery for £80,000 in its accounting year. It claims the AIA on the full £80,000. This reduces taxable profits to £100,000. Without the AIA, the company would pay corporation tax at marginal relief rates on £180,000. With the AIA, it pays on £100,000 instead — a meaningful reduction in the tax bill.
Example 3: Mixed-use asset
A freelance graphic designer buys a computer for £3,000 and uses it 70% for work and 30% for personal use. She can claim the AIA on 70% of the cost — £2,100. The remaining 30% does not attract any tax relief.
Tips for making the most of the AIA
Time purchases to match your tax year
If you are planning a significant capital purchase, consider whether to bring it forward into the current accounting period or delay it into the next one. This depends on your projected profits and whether you want to reduce this year’s tax bill or next year’s.
Do not waste the AIA on assets that already attract 100% relief
Certain assets attract first-year allowances or other 100% reliefs automatically. Where that is the case, using your AIA on them may not add any extra benefit. Speak to an accountant to make sure the AIA is being applied where it creates the most tax saving.
Keep clear records
HMRC can ask you to substantiate capital allowance claims. Keep purchase invoices, delivery notes, and any hire purchase agreements. Record the date the asset was first used in the business. Good records protect your claim if HMRC ever enquires into your return.
Consider your software and digital tools
IT equipment and software often qualifies for the AIA. If you are using accounting software such as Xero, any hardware or licences purchased outright may be claimable. If you want help getting more from your accounting software, Xero training can help you track asset purchases accurately from day one.
Watch out for the connected party rules
If you own multiple businesses — whether as a sole trader alongside a limited company, or as director of several companies — take advice before assuming each business gets its own full AIA. The rules on connected parties can restrict the total allowance available across the group.
Plan ahead with management accounts
If you review your financial position mid-year through management accounts, you can make informed decisions about capital spending before your year end rather than finding out the tax impact after the fact.
The annual investment allowance is one of the most straightforward and effective tax reliefs available to UK businesses. The £1 million limit means most small and medium-sized businesses will never hit the cap, and the ability to deduct the full cost in year one makes a real difference to cash flow and the after-tax cost of investment. Whether you are a sole trader buying tools or a limited company upgrading machinery, making full use of the AIA should be part of your annual tax planning conversation with your accountant.
Frequently asked questions
Can I claim the annual investment allowance on a car?
No. Cars are specifically excluded from the AIA. Passenger cars go into the capital allowances pool and attract writing down allowances at either 18% or 6% per year depending on their CO2 emissions. Commercial vehicles such as vans and lorries do qualify for the AIA.
What is the annual investment allowance limit for 2025/26?
The AIA limit is £1,000,000 for 2025/26. This limit applies per business, per year, and has been set permanently at this level since 1 January 2022. If your accounting period is less than 12 months, the limit is reduced proportionately.
Can a limited company and a sole trade owned by the same person each claim the full AIA?
Not always. HMRC’s connected party rules mean that where businesses are under common control, only one AIA is available between them in total. The AIA can be allocated across those businesses as you choose, but the combined claim cannot exceed £1 million. Take advice if you run multiple business structures.
What happens if I sell an asset I claimed the AIA on?
When you sell an asset on which you claimed the AIA, a balancing charge arises. This is effectively a clawback of some or all of the relief you received. The sale proceeds (up to the original cost) are added back as taxable income in the year of sale. This is particularly relevant for sole traders who may sell equipment when winding down their business.
Does the AIA apply to second-hand assets?
Yes. The AIA applies to both new and second-hand plant and machinery, provided the other qualifying conditions are met. The asset must be purchased outright or on hire purchase, and it must be used in your trade.
Can I claim the AIA on assets bought on finance?
It depends on the type of finance. Hire purchase agreements allow you to claim the AIA because you are treated as owning the asset from the start of the agreement. Finance leases do not qualify — lease payments are treated as a business expense rather than capital expenditure. Operating leases are treated similarly. If you are unsure which type of agreement you have, check with your accountant before making a claim.
