Annual Investment Allowance Explained: The £1 Million Cap & What Qualifies

The Annual Investment Allowance (AIA) is the capital allowance most small and medium UK businesses rely on when they claim capital allowances from HMRC. It’s a genuinely generous tax break, 100% relief on qualifying spend, but the detail around what qualifies and how the cap is shared trips people up.

How the AIA works

The AIA gives 100% tax relief in the year of purchase on qualifying expenditure on plant and machinery, up to an annual cap of £1 million, per GOV.UK’s Annual Investment Allowance guidance. Instead of spreading relief over several years through Writing Down Allowances, the full cost is deducted from taxable profits straight away, provided the spending falls within the cap.

The AIA is available to sole traders, partnerships, and limited companies alike, and it sits alongside other capital allowances such as First-Year Allowances, which give enhanced relief on specific categories of asset outside the AIA cap rather than replacing it. The £1 million maximum amount has applied permanently since 1 January 2019, after a period at a lower level, so it’s worth checking any older guidance still quoting a smaller cap.

For most small and medium businesses, annual capital spending sits comfortably under £1 million, so in practice the AIA covers the full cost of the year’s equipment purchases.

The £1 million cap and short accounting periods

The £1 million cap applies per 12-month accounting period. If your accounting period is shorter, for example because a company changed its year-end, the cap is reduced proportionally. A 6-month accounting period, for instance, would have a £500,000 AIA cap, not the full £1 million.

This is worth checking carefully around any change of accounting date, since spending that would have been fully covered in a normal 12-month period might exceed a reduced cap.

What qualifies

The AIA covers most plant and machinery used in the business, including:

• Equipment and tools
• Machinery
• Computers and office equipment
• Commercial vehicles (vans, lorries)
• Fixtures and integral features of a building (electrical systems, water systems, heating, lifts)

What doesn’t qualify

Several categories are excluded from the AIA entirely, so you cannot claim it against these business expenses:

• Cars. No business car qualifies for the AIA, regardless of emissions, and this applies to every type of business car a company or sole trader might buy. Cars instead fall into Writing Down Allowance pools, see our capital allowances guide and company car tax guide for how this works.
• Land and buildings. The structure of a building itself doesn’t qualify, though integral features within it can.
• Gifted assets, or assets previously used personally before being brought into the business. These are usually restricted to Writing Down Allowances rather than the full AIA, since the asset wasn’t bought new for business use.

AIA vs Full Expensing

The AIA isn’t the only 100% first-year relief available. Full Expensing gives companies (not sole traders or partnerships) 100% relief on new, unused main-rate plant and machinery with no cap at all, which makes it useful once spending goes beyond the £1 million AIA limit in a single accounting period. In practice, most companies use the AIA first for the bulk of their qualifying spend, then rely on Full Expensing for anything above the cap. Our capital allowances guide covers how the AIA, Full Expensing, and Writing Down Allowances fit together for a business with larger capital spending.

Shared cap for connected companies

Where companies are connected, generally part of the same group, or under common control by the same person or people, they must share a single £1 million AIA cap between them, rather than each company claiming its own £1 million.

This rule exists specifically to stop a business splitting itself into several companies purely to multiply the allowance. If your business structure includes more than one company under common ownership, the AIA needs to be allocated between them, and it’s easy to get this allocation wrong without checking the connected-company rules properly.

Balancing charge on disposal

If an asset qualified for full AIA relief and is later sold or disposed of, the proceeds (capped at the original cost) are added back to taxable profit as a balancing charge. Because the AIA already gave 100% relief on the purchase, this prevents also getting relief and keeping the sale proceeds tax-free, in effect it claws back the portion of relief attributable to the asset’s remaining value.

This is a common oversight when equipment is sold or a vehicle is traded in, the balancing charge needs to be calculated and included in the tax return for the year of disposal.

Getting AIA claims right

Because the AIA cap can shrink with short accounting periods, is shared across connected companies, and interacts with balancing charges on disposal, it’s an area where claims are often understated, or occasionally over-claimed. Whether you’re a sole trader, a partnership, or a limited company, getting the timing and allocation right is what lets you maximise the tax savings HMRC allows on qualifying plant and machinery, rather than leaving relief on the table. Our Accounts & Corporation Tax service reviews qualifying spend, disposals, and group structure as part of preparing your accounts and Corporation Tax return.