What is the Annual Investment Allowance (AIA)?
The Annual Investment Allowance is a UK tax relief that lets a business deduct the full cost of qualifying equipment, up to £1 million a year, from its taxable profits.
What the Annual Investment Allowance means
When a business buys equipment, the cost does not go straight through the profit and loss account. It is a fixed asset and is spread over its useful life with depreciation. HMRC ignores depreciation for tax and gives capital allowances instead.
The Annual Investment Allowance (AIA) is the most generous of those allowances for most small businesses. It gives a 100% deduction in the year of purchase for qualifying plant and machinery, up to £1,000,000 of spending a year. The limit was made permanent at that level, so nearly every small business can write off its equipment in full straight away.
Qualifying items include computers, tools, machinery, office furniture, vans and many fixtures in commercial property. Cars do not qualify. Sole traders, partnerships and companies can all claim it, and companies also have full expensing for new main-rate equipment, which has no upper limit.
Example
A plumbing company buys a new van for £30,000 and tools for £5,000 in its accounting year. Its profit before capital allowances is £80,000.
| Without AIA | With AIA | |
|---|---|---|
| Profit before allowances | £80,000 | £80,000 |
| Capital allowances | £4,900 (14% writing down allowance) | £35,000 |
| Taxable profit | £75,100 | £45,000 |
With AIA the taxable profit falls to £45,000, all within the 19% small profits rate, so Corporation Tax is £8,550. Without it, tax would be considerably higher this year, with the rest of the relief trickling in over many years.
Why it matters for your business
AIA turns equipment spending into an immediate tax saving, which helps cash flow when you are investing. The timing of a purchase matters: buying on the last day of your accounting period gives a full year's relief, while buying a day later pushes the relief into the following year.
It is not free money. A van bought for £30,000 still costs £30,000; the allowance only reduces the tax on your profits. If you later sell an asset you claimed AIA on, the sale proceeds are added back to your profits as a balancing charge.
AIA vs depreciation
Depreciation is the accounting cost shown in your accounts. AIA is the tax relief. Your accountant adds back depreciation and deducts capital allowances in the tax computation, so the two never double up.
Common questions
No. Cars are excluded from the Annual Investment Allowance. They get writing down allowances based on CO2 emissions instead, although new zero-emission cars bought by a business can qualify for a 100% first-year allowance. Vans, lorries and motorcycles do qualify for AIA.
Yes. The Annual Investment Allowance is permanently set at £1,000,000 a year. If you are in a group of companies, the group shares one allowance, and the limit is reduced proportionately for accounting periods shorter than 12 months.
Yes, sole traders and partnerships can claim AIA on qualifying equipment. If you use the cash basis, you simply deduct equipment costs as an expense instead, which has the same effect for most items other than cars.