UK Annual Investment Allowance (AIA) 2026/27: £1,000,000 Capital Tax Relief

QWhat is the Annual Investment Allowance for 2026/27?

£1,000,000 per business per accounting period (Section 38A-38D Capital Allowances Act 2001). Lets you deduct 100% of qualifying capital expenditure from taxable profit in the year of purchase. Made permanent at £1,000,000 from 1 April 2023 (was a temporary £1m level 2019-2023, originally £200k pre-2019). Applies to: sole traders, partnerships, limited companies, LLPs. Doesn't apply to: trusts, charities, individual landlords (Section 38A(1)(b)). The £1m is a CAP not a guaranteed allowance - you can only claim AIA on qualifying expenditure actually incurred. Worked example: £150k qualifying capex in 2026/27 = £150k deducted from taxable profit (subject to having profit to deduct from). The full £1m only applies to qualifying expenditure of £1m+. Most SMEs never approach the cap; mainly relevant to larger businesses with major equipment investment cycles.

QWhat qualifies for AIA?

Plant + machinery used in the trade, with specific exclusions. Qualifying: computers, machinery, office furniture, fittings, vans + commercial vehicles, tools, integral features (electrical, HVAC, lifts), software (perpetual licenses). NOT qualifying: cars (separate Capital Allowance regime - though EVs get 100% First Year Allowance under different rules), buildings + structures (Structures + Buildings Allowance at 3%/year), land, leased assets (only the owner claims), assets used outside the UK, assets given to the business (must have been paid for). The Capital Allowances Manual CA23083+ provides detailed examples. Mixed-use items: AIA available on the business-use proportion only (e.g. 80% business laptop = 80% of cost qualifies). Connected-party purchases: AIA may be denied if the asset was previously used in a connected business - anti-avoidance rule preventing intra-group "fresh start" claims.

QWhat is AIA vs Full Expensing?

Two parallel reliefs offering 100% first-year deduction on qualifying capex - but different rules. AIA: £1m cap, applies to ANY business size, covers most plant + machinery + integral features + commercial vehicles, available indefinitely (permanent from April 2023). Full Expensing (Section 7 Finance (No. 2) Act 2023; made permanent by Section 1 Finance Act 2024): NO CAP, but only for COMPANIES (not sole traders / partnerships), only NEW + UNUSED plant + machinery (no second-hand), introduced April 2023 as a permanent successor to the "super-deduction". Covers most main-pool assets but excludes special-rate-pool items (those get 50% First Year Allowance instead). Practical decision: companies investing £1m+ in new plant typically use Full Expensing for everything above the AIA cap. Sole traders / partnerships only have AIA (no Full Expensing). Mixed claims: use AIA first for special-rate-pool items (qualifying at 100% under AIA vs 50% under Full Expensing), then Full Expensing for excess main-pool items above the £1m AIA cap.

QDo connected businesses share the £1m AIA?

Yes. Companies + sole traders in "connected" relationships share a single £1,000,000 AIA between them (Section 38B CAA 2001). Connected company test: under common control - shares ≥50% controlling interest by the same person/group, or one company controls the other. Group companies share AIA. Connected sole-trader test: where one person controls multiple businesses (e.g. shareholder of a Ltd Co + sole trader simultaneously). Multiple LLPs / partnerships with overlapping ownership also share AIA. Allocation: connected businesses can ALLOCATE the £1m AIA between themselves however they choose (within the cap). If not specified, HMRC allocates proportional to qualifying expenditure. Anti-avoidance: businesses cannot artificially split into separate entities purely to access multiple £1m AIAs - HMRC will challenge under the Targeted Anti-Avoidance Rule (TAAR). Genuine separate businesses with separate trades + employees + decision-making each get their own AIA. Borderline cases get HMRC scrutiny.

QHow does AIA work in straddling accounting periods?

If your accounting period straddles a change in AIA rates (rare since AIA is now permanent at £1m), the AIA is apportioned proportionally to the days in each rate period (Section 51A CAA 2001). Short / long accounting periods: AIA is also pro-rated based on the length of the accounting period. A 6-month accounting period gets £500k AIA (half of £1m); an 18-month period gets £1.5m AIA. Used when companies change year-end or in their first / last year of trading. Worked example: company changes year-end from December to March, creating a 15-month accounting period 1 Jan 2026 to 31 Mar 2027. AIA available = £1m × (15/12) = £1.25m. Useful for accommodating one-off large capex above the normal £1m cap by carefully timing year-end changes. Limitation: HMRC scrutinises deliberate year-end changes designed to inflate AIA - changes need genuine commercial reason. Pure-tax-driven changes can be challenged under TAAR.

QWhat about Cars - do they qualify for AIA?

No - cars are excluded from AIA (Section 38B(2) CAA 2001). Cars follow separate Capital Allowances rules. Electric cars (zero CO2 emissions): 100% First Year Allowance under Section 45D CAA 2001 - same effective benefit as AIA but technically a different relief. Available indefinitely (last extended April 2024 to April 2026 for new electric cars; expected to be further extended). Petrol/diesel cars: Writing Down Allowance only - 18% main pool if CO2 ≤ 50g/km, 6% special-rate pool if CO2 > 50g/km. No first-year acceleration. Plug-in hybrids: typically 6% WDA special-rate pool unless very low emissions. Leased cars: 15% disallowance on car lease costs if CO2 > 50g/km (Section 56-58 CTA 2009). Practical implication: company-owned electric cars get effectively the same 100% deduction as AIA - but via the separate 45D scheme. Petrol/diesel cars are far less tax-efficient - slow write-down over many years.

QWhat happens if my capex exceeds £1,000,000?

Excess above the AIA cap goes into the standard Capital Allowance pools for slower deduction. Main pool (most plant + machinery, vans, commercial vehicles): 18% Writing Down Allowance (WDA) per year. After 5 years, ~62% of the original cost has been deducted; after 10 years, ~85%; full deduction takes ~20 years on a reducing-balance basis. Special rate pool (integral features, long-life assets, thermal insulation): 6% WDA per year. Even slower - ~26% after 5 years, ~46% after 10 years. Full Expensing option (companies only): unlimited 100% deduction on NEW + UNUSED main-pool plant + machinery - effectively replaces AIA above the £1m cap for qualifying companies. Worked example: £1.5m of qualifying main-pool plant by a Ltd company. £1m via AIA (100% deduction). £500k via Full Expensing (100% deduction). Net: £1.5m deducted year 1. Sole trader same purchase: £1m via AIA + £500k into main pool at 18% WDA = £1.09m total year-1 deduction. Sole trader at higher marginal rate could be £130k worse off year 1 than the Ltd equivalent.

QWhen should I time my capex purchases for maximum AIA benefit?

Three timing levers. (1) Use the full £1m per accounting period: if you're going to buy £1.5m of equipment over 18 months, splitting across 2 accounting periods (£750k each) avoids the £1m cap entirely. (2) Bring forward purchases to capture AIA: if profits are temporarily high (one-off contract win), buying needed equipment early shelters the high-profit year. (3) Defer purchases to align with profit recognition: if profits are low this year, defer non-urgent capex to a higher-profit future year for better marginal-rate deduction. Effective rate analysis: a 25% main-rate company saves 25p of CT per £1 of AIA. A 19% small-profit-rate company saves only 19p. A sole trader at 40% higher rate saves 40p. So timing capex to fall in higher-rate years yields more relief per £1. Aware of marginal relief (£50k-£250k profit band: 26.5% effective marginal CT rate) - this band can be a sweet spot for capex timing. Year-end ordering: capex is treated as incurred when the asset is brought into use (Section 5 CAA 2001), not when ordered or paid for. Order in February but use in April = April year, not February.

QCan I claim AIA on equipment bought from abroad?

Yes, with conditions. AIA applies to qualifying plant + machinery USED IN THE UK trade, regardless of where purchased (Section 38A(1) CAA 2001). So buying machinery from Germany / China / US for use in your UK factory is eligible for AIA on the GBP-cost (including import duties + VAT - except VAT is recoverable separately if VAT-registered). Exclusion: assets USED OUTSIDE THE UK don't qualify. Plant + machinery shipped abroad for use in non-UK operations gets Capital Allowances under different rules (or none, depending on the host country tax position). Currency: capex is recorded in GBP at the exchange rate on the date of acquisition (HMRC Capital Allowances Manual CA10010+). Subsequent currency movements are not part of capital allowances. Customs duties + import VAT: form part of the capital cost (duties are capital; VAT is reclaimable if VAT-registered). Brexit impact: post-Brexit, EU-purchased equipment now subject to import duties + customs declarations - increases the capex base for AIA purposes but adds administrative cost.

QWhat records do I need for AIA claims?

Section 12B TMA 1970 + Section 1133-1142 CTA 2009 - keep for 6 years after the relevant accounting period filing deadline. Required records: invoice / receipt for each capex purchase showing: supplier, item description, cost (excluding VAT), date acquired, date brought into use. Capital allowances register: most accounting software (Xero, QuickBooks, Sage, FreeAgent) maintains a capital allowances ledger automatically. Decision documentation: if claiming AIA on borderline-qualifying items (mixed-use, integral features, large software purchases), document the reasoning. HMRC may challenge years later. Pool tracking: for assets going into main pool (above AIA cap), maintain ongoing pool balance: opening pool + additions - disposals = closing pool, then 18% WDA on closing pool. Sage / Xero handle this automatically. HMRC enquiry rate: 1 in 50 corporation tax returns get a capital allowances review, slightly higher for large capex years or industries with HMRC compliance focus (construction, hospitality, technology startups claiming software AIA on subscriptions).

QCan I claim AIA on items I bought BEFORE starting trade?

Yes via "pre-trading expenditure" rules (Section 12 + 13 CAA 2001). Capex incurred up to 7 years before trading commencement can be claimed as AIA in the FIRST year of trading. Conditions: (1) item must qualify for AIA under standard rules at the time of pre-trading purchase; (2) item must be brought into use in the trade once trading begins; (3) you held the item as a "person who would have been chargeable to tax if there had been a trade" during the gap period. Worked example: bought workshop equipment in 2024 in anticipation of starting a business, actually started trading 2026/27. The 2024 equipment is treated as acquired on the trade-start-date in 2026/27 for AIA purposes. AIA can be claimed on the FULL pre-trading capex up to £1m. Useful for: founders building up equipment before incorporation, R&D-stage startups capitalising expensive lab equipment. Less useful for: small purchases under £1k (just claim as revenue expense at trade start instead). Keep ALL receipts + dates from pre-trading period.

QHow does AIA work with the Super-Deduction and Full Expensing succession?

Super-Deduction (April 2021 - March 2023): temporary 130% first-year deduction on new plant + machinery. Companies effectively got £1.30 of deduction per £1 of capex - more generous than AIA's 100%. ENDED 31 March 2023. Replaced by Full Expensing (1 April 2023 onwards): 100% deduction (same as AIA but no £1m cap), companies only, new + unused plant + machinery only. Permanent under Spring Budget 2024 announcement. 50% First Year Allowance for Special Rate (April 2023 onwards): 50% first-year deduction on new + unused special-rate-pool plant (integral features, long-life assets). The remaining 50% goes into the special rate pool at 6% WDA. Stack with AIA: AIA can be used FIRST on special-rate-pool items (full 100%) before exhausting the £1m cap; remaining special-rate capex can then use the 50% FYA. Many tax advisors recommend AIA-first for SRP items to maximise the special-rate benefit, then Full Expensing for main-pool excess. Sole traders / partnerships only have AIA + standard pool WDAs - no Full Expensing or 50% FYA available to them.