Annual Investment Allowance (AIA) 2026/27: Limits, Rules and How to Claim

The Annual Investment Allowance (AIA) lets UK businesses deduct up to £1 million of qualifying plant and machinery spending from their profits in the year they buy it, giving 100% tax relief. In 2026/27 it is available to companies, sole traders and partnerships, and covers second hand equipment.

• Limit: £1 million per business per 12 month accounting period
• Who can claim: companies, sole traders and most partnerships
• What qualifies: machinery, equipment, computers, software and furniture
• What does not: most cars, land and buildings
• New for 2026/27: a 40% first year allowance, and a lower 14% writing down allowance

What is Annual Investment Allowance?

The Annual Investment Allowance (AIA) is a tax relief that allows you to deduct the full cost of qualifying plant and machinery from your profits before tax, up to £1 million a year. If you later sell an asset you claimed AIA on, the sale proceeds are brought back into your capital allowances calculation and may create a balancing charge.

How Does Annual Investment Allowance Work?

The Annual Investment Allowance (AIA) is a tax break that enables UK firms to deduct the entire cost of eligible plant and machinery from their taxable profits in the year the spending is incurred.

• Qualifying Expenditure: AIA applies to most of the tangible assets your business needs to operate, including machinery, equipment, computers, furniture, and certain fixtures. It does not apply to land, buildings or cars. Vans and other commercial vehicles can qualify. AIA is also not available on assets bought from a connected person or received as a gift.

• Claiming the Allowance: Assume your company spends £50,000 on new equipment in a 12 month accounting period, and the AIA maximum is £1 million. You can deduct the entire £50,000 from your taxable profits, reducing your corporation tax bill. A sole trader or partnership claims in the same way and reduces its income tax.

• Annual Limit: The AIA cap is set in legislation and is £1 million for each 12 month accounting period. It is shared by groups and companies under common control, and reduced for shorter periods. If your spending exceeds the limit, the excess goes into the main pool or special rate pool and attracts writing down allowances (14% and 6% from April 2026), unless the 40% first year allowance or Full Expensing applies.

• Timing Matters: AIA is claimed in the accounting period in which the spending is incurred, which is usually when you become legally obliged to pay, so check contract dates near year end. Buying before the period end gives you the full allowance for that period. You do not have to claim all of it, as you can claim all, part or none. If you spend more than £1 million, allocate AIA to special rate pool assets first, because those assets otherwise get only 6% a year, or 50% in year one for companies under Full Expensing.

How to Claim the Annual Investment Allowance

Claiming AIA takes five practical steps.

• Sort your assets: List the qualifying assets bought in the period and note which go in the main pool and which in the special rate pool (integral features and long life assets).
• Decide how much to claim: You can claim all, part or none of the AIA. Companies with spending over £1 million should allocate AIA to special rate pool assets first.
• Companies: Include the claim in the capital allowances section of your corporation tax computation and CT600.
• Sole traders and partnerships: Enter it in the capital allowances boxes of your Self Assessment return or partnership return.
• Timing: Spending counts in the period when you become legally obliged to pay.
• Records: Keep invoices, delivery dates and evidence of business use.
• Electric cars: New zero emission cars do not qualify for AIA but have a separate 100% FYA until 31 March 2027 for companies and 5 April 2027 for individuals.

Who Can Claim Annual Investment Allowance (AIA)?

The good news is that most UK businesses can benefit from the Annual Investment Allowance, regardless of whether they are sole traders, partnerships, or limited companies. AIA is meant to promote investment in business growth, so it is available to a wide range of business structures.

• Limited Companies: If your company is a limited company, you can deduct AIA from your profits before corporation tax is calculated.

• Sole Traders & Partnerships: AIA reduces the profits that income tax is charged on. This is especially useful if you are investing in equipment, technology, or machinery to expand your business. Sole traders on the cash basis usually deduct purchases as expenses instead. Partnerships with a company as a partner may not qualify for AIA.

• Firms of All Sizes: Whether you are a small start-up purchasing a few computers or a larger company investing in heavy devices, you can profit from AIA, as long as your purchases fall under the eligible assets category.

• Exceptions & Special Cases: AIA does not apply to cars, land and buildings, assets from a connected person, or gifts.

What Qualifies for Annual Investment Allowance?

Not every business purchase is eligible for the Annual Investment Allowance (AIA), therefore it’s crucial to understand what counts. AIA is primarily focused on the capital assets that your company utilises to run, allowing you to save money while investing for growth.

Qualifying Assets: The following are generally eligible for AIA:

• Machinery and equipment – from factory machines to office printers.
• Computers and IT equipment – laptops, servers, and hardware for business use. Capital spending on computer software generally qualifies too.
• Furniture and fixtures – desks, chairs, shelving, and fittings for your business premises. Integral features such as electrical and water systems qualify but go into the 6% special rate pool.
• Plant and tools – tools, vans and specialised equipment.

Exclusions: Some items cannot be claimed under AIA, including:

• Cars – passenger vehicles are generally excluded, though vans or trucks may qualify.
• Land and buildings – buying property or land does not count.
• Assets used for non-business purposes – anything not used solely for your business may be excluded.

Partial Use & Apportionment

If a sole trader or partner uses an asset partly for private purposes, only the business portion qualifies. For example, a laptop used 70% for business qualifies for 70% of its cost. For a company asset used personally by a director, the claim is usually made in full and the personal use is dealt with through a benefit in kind.

Second-hand assets qualify too

One of AIA’s biggest advantages is that it applies to second-hand and used equipment, not just brand-new purchases. (This is the key point where AIA beats Full Expensing — see the comparison below.)

VAT treatment

If your business is VAT-registered, you claim AIA on the cost of the asset after deducting any VAT you can reclaim. If you are not VAT-registered, you claim AIA on the full cost including VAT.

HMRC Reference: HMRC gives detailed guidance to qualifying items for AIA. Following these criteria helps you claim the correct amount of relief and keeps your claim accurate

Example: 

If your business spends £10,000 on computers, £5,000 on office furniture, and £20,000 on machinery in the same year, all three purchases are qualified. Assuming you are within the AIA limit, you might deduct the entire £35,000 from your taxable profits, thus lowering your tax burden.

What Does Not Qualify for Annual Investment Allowance?

While the Annual Investment Allowance (AIA) is an excellent way to lower your tax burden, not every company transaction qualifies. Knowing what doesn’t qualify might help you avoid mistakes and guarantee your claim is completely compliant with HMRC standards.

• Passenger Cars: Most regular automobiles purchased for business cannot be claimed under the AIA, even if they are used solely for work. Vans, trucks, and other commercial vehicles are typically eligible, and new zero emission cars have a separate 100% first year allowance.

• Land and Buildings: The AIA does not apply to the purchase of land or property, which includes offices, warehouses, and factories. While you can claim some items within buildings (such as machinery or office furniture), you cannot claim the structure itself.

• Business Use: Only the business part of an asset qualifies, so a part private asset is claimed in proportion.

• Intangible Assets: AIA covers plant and machinery. Goodwill and most intangible assets do not qualify, although other reliefs can apply. Capitalised software is the main exception.

• Connected persons and gifts: assets bought from a connected person, or received as a gift, do not qualify.

How Much AIA Can You Claim?

The yearly Investment Allowance (AIA) allows UK firms to claim a large amount of tax relief on eligible capital expenditure. How much you can claim depends on your total spending and the annual limit.

The Annual Limit: The AIA maximum is £1 million for each 12 month accounting period in 2026/27.

What Happens If You Spend Less Than the Limit: If your qualifying purchases are below the £1 million cap, you can claim the full amount immediately. For example:

• Purchase of machinery and office equipment: £150,000
• AIA claimed: £150,000
• Taxable profits reduced by £150,000

Spending Over the Limit: You can claim £1 million under AIA. The excess goes into the main pool or special rate pool and attracts writing down allowances, or can qualify for Full Expensing or the 40% FYA. Example: total purchases of £1.3 million; AIA claimed immediately £1 million; the remaining £300,000 goes into the pools for writing down allowances at 14% (main pool) or 6% (special rate pool). 

Example:

• Total purchases: £1.3 million
• AIA claimed immediately: £1 million
• Remaining £300,000: claimed over subsequent years using writing-down allowances

The £1 million limit is shared across a group

The £1 million is per business, and shared between companies in the same group or businesses under common control — it is not £1 million each. Connected businesses must allocate the single allowance between them.

Short accounting periods are pro-rated

If your accounting period is shorter than 12 months, the AIA is reduced proportionately. For example, a 9-month period gives a maximum AIA of £750,000, not £1 million.

What Changed for AIA in 2026/27? The New 40% FYA and 14% WDA

AIA stays at £1 million and is now effectively permanent, but two changes affect any spending above that limit.

• Writing down allowance: The main pool rate fell from 18% to 14% from 1 April 2026 for companies and 6 April 2026 for sole traders and partnerships. The special rate pool stays at 6%. If your year end falls mid period, a blended rate applies (for example 16% for a 30 September 2026 year end).
• New 40% first year allowance (FYA): From 1 January 2026, qualifying new main rate spending can attract 40% relief in year one. It mainly helps sole traders and partnerships who spend more than £1 million, and businesses buying assets for leasing. It has no annual cap. Cars and second hand assets are excluded.

Example: A partnership buys £1.4 million of new main rate equipment. AIA covers £1,000,000. The remaining £400,000 qualifies for the 40% FYA, giving £160,000 of relief in year one. The other £240,000 goes into the main pool for writing down allowances at 14%.

Strategic Ways to Maximise AIA Savings

The Annual Investment Allowance (AIA) is an effective tool for lowering your UK business’s tax burden, but smart preparation is required to maximise its benefits. By properly timing your purchases and selecting the right assets, you can increase cash flow while saving thousands of pounds in taxes.

• Plan Purchases Around Your Accounting Period: Timing is important. Purchasing qualified assets before the end of your accounting year allows you to claim the entire AIA in that period.  Delaying purchases to the next period can help if your spending is close to £1 million, but a company buying new main rate assets may not need to, because Full Expensing is uncapped.

• Use AIA Where It Is Worth Most: Allocate AIA to special rate pool assets first, because those assets otherwise get only 6% a year (or 50% for companies under Full Expensing).

• Choose the Right Relief for Large Purchases: If your investment exceeds £1 million, compare splitting purchases across periods with Full Expensing (companies) or the 40% FYA (sole traders and partnerships).

• Claim Only What You Need: AIA is optional. Claiming part leaves the balance in the pool for later years, which can suit businesses with low profits.

• Keep Detailed Records: Maintain accurate records of purchases, invoices, and company usage. This simplifies claiming AIA and guarantees compliance with HMRC, lowering the chance of disputes or audits.

What Happens When You Sell an Asset Claimed Under AIA?

Claiming the Annual Investment Allowance (AIA) provides your business with immediate tax benefit on qualifying assets, but what if you later sell or dispose of those assets? HMRC has standards in place to ensure that your tax claim accurately reflects the change in ownership or value.

• Balancing Charge Applies: If you sell an asset that you previously claimed under the AIA, you may be required to compute a balancing charge. This is simply a technique to recoup part of the tax relief you previously claimed if the selling revenues exceed the asset’s tax written-down value.

Example: You buy machinery for £50,000 and claim the full AIA, so its tax value is nil. A year later you sell it for £40,000. The £40,000 proceeds are deducted from your main pool. If the pool has no balance, this creates a £40,000 balancing charge, added to your taxable profits. If other assets remain in the pool, the proceeds reduce the pool first.

• Selling for less than you paid still brings the proceeds back: Selling for less than you paid still brings the proceeds back, because AIA already gave you 100% relief.

• Assets Sold Before Year-End:  If you sell in the same period you bought, you only claim on the net cost of the asset.

• Keep Accurate Records: Accurate record-keeping of asset purchases, claims, and sales is critical. Proper paperwork assures compliance with HMRC regulations and prevents conflicts when an item is sold.

Common AIA Mistakes to Avoid

• Inaccurate records: Keep invoices, receipts and delivery notes for qualifying assets so you can support your claim.
• Not claiming the full amount: Keep a list of all qualifying assets bought in the period. Missing items means paying more tax than necessary.
• Claiming more than once: Do not claim AIA twice for the same asset. This often happens when an asset is bought, sold and replaced in the same year.
• Claiming for assets that do not qualify: Cars, land, buildings and personal items cannot be claimed. HMRC can disallow the deduction and charge penalties.
• Ignoring group or common control limits: Connected companies share one £1 million allowance. Claiming £1 million in each can lead to an excessive claim.
• Overlooking a better relief: Companies buying new main rate assets may do better with Full Expensing, and unincorporated businesses above £1 million may benefit from the 40% FYA.

Real-World Example: How AIA Reduces Your Tax Bill

A small UK manufacturer has taxable profits of £120,000 for 2026/27 and buys £60,000 of qualifying machinery and equipment, within the £1 million limit.

• Corporation tax before AIA: £28,050 (25% less marginal relief of £1,950)
• Taxable profits after AIA: £60,000
• Corporation tax after AIA: £12,150 (25% less marginal relief of £2,850)
• Tax saved: £15,900

This assumes a standalone company with no associated companies and a 12 month accounting period. Between £50,000 and £250,000 of profit, marginal relief gives an effective rate of 26.5%, so each £1 of AIA saves about 26.5p.

When Should You NOT Use AIA?

Claiming the full Annual Investment Allowance (AIA) can save your company thousands of pounds in taxes, but it isn’t always the wisest choice.

• Claiming the full amount makes sense when your profits are high enough to use the relief.
• Claim less if full AIA would create a loss or push profits below your personal allowance or the small profits band, wasting some of the benefit. The unclaimed part stays in the pool for later writing down allowances.
•  Partial claims are needed where an asset has private use.
• If you are a limited company buying new main-rate plant and machinery and you expect to exceed the £1m limit, consider Full Expensing instead of (or alongside) AIA — see the next section.

Full Expensing vs AIA vs 40% FYA: Which Should You Use?

Since 1 April 2023, companies have had a second 100% relief, Full Expensing, which is a permanent part of the UK tax system. It sits alongside AIA, and for many companies the best answer is a combination of the two.

• Who can use it: Full Expensing is only for companies paying Corporation Tax. Sole traders and partnerships use AIA, and the new 40% FYA for spending above £1 million.
• The cap: AIA is capped at £1 million a year; Full Expensing is unlimited for qualifying new main-rate plant and machinery.
• Second-hand assets: AIA’s key advantage — it covers second-hand and used equipment, whereas Full Expensing applies only to new and unused assets.
• Cars: Both exclude most cars.

Feature	AIA	Full Expensing	40% FYA	Writing Down Allowance
Year 1 relief	100% up to £1m	100%, unlimited (new main rate)	40%, unlimited	14% main pool, 6% special rate
Who can claim	Companies, sole traders, partnerships	Companies only	Mainly sole traders, partnerships, leasing	All
Second hand assets	Yes	No	No	Yes
Most cars	No	No	No	Yes (in pools)
Annual limit	£1m (shared across group)	None	None	None

FAQs: Frequently Asked Questions

Conclusion

The Annual Investment Allowance (AIA) is an effective tool for UK firms to lower their tax liabilities while investing in growth. Understanding what qualifies, carefully arranging purchases, and remaining within the AIA limit can improve your tax position and cash flow. 

Whether you are a small business replacing equipment or a larger corporation growing operations, judicious use of AIA helps you get the most out of your investments. Working with professionals like Cox Hinkins can help identify eligible assets and support an accurate claim.

Disclaimer: Kindly note this blog provides general information and should not be considered financial advice. We recommend consulting a qualified financial advisor for personalised guidance. We are not responsible for any actions taken based on this content.