The Annual Investment Allowance, or AIA, is a generous form of tax relief which supports and stimulates business growth across the UK. It enables companies and self-employed individuals to deduct the full cost of specific capital investments from their taxable profits in the year of purchase.
This immediate reduction, instead of spreading relief over time, can reduce the amount of tax your business needs to pay.
What is the Annual Investment Allowance?
The Annual Investment Allowance allows businesses to deduct 100% of the cost of qualifying plant and machinery purchases from their taxable profits in the year of acquisition. This tax benefit is more immediate and impactful than traditional depreciation methods.
As of now, the AIA threshold is £1,000,000 per year. This means businesses can deduct up to this amount of eligible capital expenditure annually from their taxable profits. For companies with significant capital investments planned, AIA offers a strategic advantage in managing both tax liabilities and cash flow.
Who Can Claim AIA?
Most business structures can claim the Annual Investment Allowance, including sole traders, partnerships made up of individuals, and limited companies. However, some exceptions apply:
- Partnerships that include corporate partners cannot claim
- Trusts generally cannot claim, except in rare circumstances
- Businesses using cash basis accounting face limitations on capital allowance claims, including AIA
- Companies or businesses under Common Control must share one AIA allowance
If you operate multiple businesses that fall under common ownership or have related activities, HMRC may treat them as a single entity for AIA purposes.
What You Can Claim On
A wide range of physical assets qualify for the Annual Investment Allowance, particularly those used wholly and exclusively for business purposes. Eligible items include:
- Machinery and production equipment
- Computers, laptops and office furniture
- Tools, storage units and workstations
- Fixtures and fittings such as shop counters and kitchen units
- Integral features such as electrical systems, lifts and air conditioning
- Commercial vehicles such as lorries, vans and forklifts
- Agricultural machinery such as tractors and irrigation systems
Assets must be new or bought from an unconnected party to qualify. You must account for any private use by reducing the claim proportionately.
What You Cannot Claim On
Certain items are excluded from AIA eligibility:
- Motor cars, even if used for business
- Items previously owned and used privately before being introduced to the business
- Gifts to the business
- Intangible assets such as goodwill, trademarks and patents
- Assets purchased in the business’s final accounting period before closure
In these situations, writing down allowances may still be available, offering tax relief over several years.
Properly Timing Your Claim
You must claim the Annual Investment Allowance in the accounting period when you purchased the asset. The purchase date depends on the payment terms:
- If payment is due within four months of contract signing, the contract date is the purchase date
- If payment is due later, the actual payment due date is the purchase date
For Hire Purchase agreements, you can claim AIA once the asset is in use, even if payments are ongoing. However, the interest portion of payments is excluded from the AIA claim.
How to Claim the Annual Investment Allowance
To claim the Annual Investment Allowance, complete the capital allowances section on your Self Assessment or Corporation Tax return. Ensure you maintain accurate records, including:
- Purchase invoices
- Delivery notes and supporting documentation
- Asset register entries
- Usage details
If your expenditure exceeds the £1,000,000 limit, you should apply AIA to assets with the lowest writing down allowance rates first (such as integral features at 6%). This strategy maximises your overall tax benefit.
Contact Us
We are not just accountants; we are Chartered Accountants with one of the most reputable and premium accounting bodies. We are registered and regulated by ACCA; so you can rest assured that you are in good hands. Knowing this, don’t hesitate to get in touch with us if you require assistance: Pi Accountancy | Contact Us