A Guide to Annual Investment Allowance (AIA) in the UK

In today’s competitive business world, having access to tax relief schemes that encourage investment in growth is crucial. The UK government’s Annual Investment Allowance (AIA) is one such scheme designed to help businesses offset the costs of purchasing qualifying assets. Whether you're a small business owner or running a larger enterprise, understanding how AIA works can save your company significant sums on its tax bill. In this blog, we’ll dive deep into what AIA is, how it works, who can claim it, and how you can make the most of this valuable incentive.

What is the Annual Investment Allowance (AIA)?

The Annual Investment Allowance (AIA) is a capital allowance that lets a business claim 100% of qualifying plant and machinery expenditure in the period the expenditure is incurred up to the annual limit. In plain English: instead of getting tax relief slowly over several years, AIA can allow you to claim it immediately, which improves cash flow.

The AIA limit for 2025/26: confirmed at  £1,000,000 

For 2025/26, the maximum AIA remains £1,000,000. There are no changes to the headline AIA limit based on the current legislation.

Two practical points that matter in real life:

• AIA is not automatic - you must claim it.
• If your accounting period is shorter or longer than 12 months, the £1,000,000 limit is pro-rated.

What qualifies for AIA (and what doesn't?

AIA generally applies to plant and machinery bought for business use. Common examples include:

• Equipment and machinery
• Computers and technology
• Tools and fixtures used in the trade
• Certain building-related items that qualify as plant/integral features (this is where classification matters)

AIA generally does not apply to:

• Cars (cars have their own rules and rates)
• Assets you didn't buy for the trade
• Items where the expenditure is specifically excluded under capital allowances rules

If you're unsure whether something is "plant" or "premises", that classification is often the difference between "relief now" and "relief slowly (or not at all)".

When do you claim AIA?

AIA must be claimed in the period in which the expenditure is incurred. It's not something you can "backdate later because we forgot".

AIA can also apply to pre-trading expenditure — claimed in the period when the qualifying activity begins (useful for new ventures or new trade lines inside an existing group).

You can choose how to allocate AIA (this is where strategy lives)

If your qualifying expenditure is under the maximum AIA, you can claim AIA on all of it.

If your qualifying expenditure is over the maximum AIA, you can allocate AIA across the spend as you see fit.

That flexibility matters. In practice, you often want to allocate AIA to the expenditure that would otherwise get slower relief (for example, items that fall into a slower-rate pool), and leave other items to be relieved under other rules where appropriate.

What happens when you dispose of an asset you claimed AIA on?

Claiming AIA doesn't "lock in" a permanent benefit regardless of what happens next.

When you dispose of an asset, the disposal proceeds are dealt with through the normal pooling rules (general pool or special rate pool, depending on the asset). This is a common area where owners get surprised if they expect disposal to be "tax free because we claimed AIA".

2026 changes you need to be aware of (and why timing matters)

Even though the AIA limit itself is stable, capital allowances beyond AIA are changing in 2026. Two changes are especially relevant for businesses planning investment programmes:

1) New 40% First Year Allowance (FYA) from 1 January 2026

A new 40% First Year Allowance will be available for main rate assets from 1 January 2026, for expenditure that sits beyond the current availability of either full expensing or the annual investment allowance.

Notably, this 40% FYA will not apply to:

• Cars
• Second-hand assets
• Assets for leasing overseas

This is not a replacement for AIA — it's part of the "what happens after AIA is used up" conversation.

2) Writing Down Allowance (WDA) main rate reduces from 18% to 14% from April 2026

From April 2026 (corporation tax) / 6 April 2026 (income tax), the main rate writing down allowance reduces from 18% to 14%.

If your chargeable period spans the change date, a hybrid rate applies based on the proportion of the period before and after the change.

Why this matters: once you've used your AIA limit, the "default" relief route is often WDAs. A drop from 18% to 14% is a material reduction in the speed of tax relief.  Caution - this is really a cash flow issue.

The practical takeaway: claim AIA now (and plan the rest)

If you're considering capital expenditure, the planning question is no longer just "does it qualify?" It's:

• Can we bring forward qualifying spend to claim AIA while it's available (up to £1m)?
• If we're investing above £1m, what relief applies to the excess - and how does the April 2026 WDA reduction affect the payback?
• Do we need to structure the investment programme across periods to optimise relief and cash flow?

This is exactly the kind of decision-making that benefits from a proper finance function - not just year-end compliance.

Common mistakes we see (and how to avoid them)

• Assuming AIA is automatic (it isn't — it must be claimed)
• Misclassifying assets (plant vs premises; main pool vs special rate pool)
• Forgetting pro-rating for short/long periods
• Treating "tax relief" as the goal rather than after-tax cash flow and ROI
• Leaving investment decisions until after the year end, when the options are narrower

How we help (Virtual Finance Office approach)

At Breaking the Mould Accounting, we help owner-managed businesses treat investment as a value decision, not a scramble for relief.

Our Virtual Finance Office (VFO) supports you to:

• Build an investment plan tied to cash flow and strategy
• Classify expenditure correctly (so claims are robust)
• Forecast the after-tax impact of different timing options
• Turn capital allowances into a deliberate lever, not an accidental outcome

If you'd like us to sanity-check a planned purchase (or a full capex programme), book a call and we'll map the options clearly.