UK Annual Investment Allowance: 2026/27
UK Annual Investment Allowance (AIA) 2026/27: £1,000,000 Capital Tax Relief
Comprehensive guide to UK Annual Investment Allowance for sole traders, partnerships, and limited companies in 2026/27. £1,000,000 cap permanent since April 2023 (Section 38A CAA 2001). 100% first-year deduction on qualifying plant + machinery + integral features + commercial vehicles. Excludes cars (separate FYA / WDA rules) and buildings (Structures + Buildings Allowance). Connected companies share single £1m. Full Expensing alternative for companies above the cap. Writing Down Allowance fallback for excess: 18% main pool / 6% special rate pool. 4 worked business scenarios from sole trader to capex-above-cap company.
2026/27 AIA framework
AIA cap
£1,000,000
Permanent since April 2023
Deduction rate
100%
First-year, full cost deducted from profit
Beyond AIA
18% / 6% WDA
Main pool / special rate pool, reducing balance
4 worked AIA scenarios
| Scenario | Capex | AIA used | Excess (WDA) | Year-1 deduction | CT/IT saving |
|---|---|---|---|---|---|
| Sole trader, modest equipment New laptop + workshop tools. AIA covers in full = £45k taxable profit. | £15,000 | £15,000 | £0 | £15,000 | £3,000 |
| SME, mid capex year Manufacturing line upgrade. Full AIA = £150k taxable profit. £50k CT saved. | £200,000 | £200,000 | £0 | £200,000 | £50,000 |
| Growing business, near AIA cap Significant fit-out + machinery. Full £900k AIA still under £1m cap. | £900,000 | £900,000 | £0 | £900,000 | £225,000 |
| Capex exceeds AIA cap First £1m via AIA (100%), remaining £500k via WDA pools (18% / 6%) - or Full Expensing for new plant. | £1,500,000 | £1,000,000 | £500,000 (year 1 WDA £90,000) | £1,090,000 | £272,500 |
What qualifies for AIA
| Asset type | AIA? | Notes |
|---|---|---|
| Computers + laptops + tablets | ✓ | Standard rate pool. NOT cars (separate rules). |
| Phones + tablets (mostly business use) | ✓ | Mixed personal use reduces by % - main pool. |
| Office furniture + equipment | ✓ | Desks, chairs, shelving, fittings. |
| Plant + machinery for trade | ✓ | Manufacturing equipment, kitchen equipment, hairdressing chairs. |
| Vans + commercial vehicles | ✓ | Including pickup trucks, but NOT cars. |
| Tractors + construction plant | ✓ | Excavators, JCBs, forklift trucks. |
| Tools + workshop equipment | ✓ | Including small hand tools and large workshop machinery. |
| Software licenses (perpetual) | ✓ | One-off purchases. Subscriptions = revenue not capital. |
| Integral features (electrical, HVAC, lifts) | ✓ | Special rate pool 6% WDA - AIA still applies but slow without it. |
| Solar panels + thermal insulation | ✓ | Special rate pool. Often combined with Net Zero capital allowance election. |
| Cars (any type, including EVs) | ✗ | Separate Capital Allowance rules. EVs get 100% First Year Allowance (separate from AIA). |
| Buildings + structures | ✗ | Use Structures + Buildings Allowance (SBA) at 3%/year instead. |
| Land | ✗ | Not capital allowance-eligible; cost added to CGT base cost. |
| Leased assets | ✗ | Available only if you own the asset. Leasee uses revenue expense deduction. |
| Items used outside the UK | ✗ | Strict territorial scope - business assets must be UK-used. |
AIA vs Full Expensing - choose your relief
| Feature | AIA | Full Expensing |
|---|---|---|
| Cap | £1,000,000 per period | No cap |
| Who can claim | All businesses (sole trader, partnership, LLP, company) | Companies only |
| Asset condition | New OR second-hand | New + unused only |
| Main pool deduction | 100% | 100% |
| Special rate pool deduction | 100% | 50% FYA + 6% WDA on rest |
| Best for | SMEs, sole traders, any second-hand purchase | Companies with capex > £1m on new main-pool plant |
Optimal stacking: AIA first on special-rate-pool items (100% via AIA vs 50% via FE), then Full Expensing for excess main-pool items above the £1m AIA cap.
Frequently asked questions
What 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.
What 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.
What 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 9A FA 2023): 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.
Do 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.
How 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.
What 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.
What 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.
When 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.
Can 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.
What 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).
Can 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.
How 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.
Related calculators and guides
- AIA calculator - interactive £1m AIA + WDA calculator.
- Capital allowances calculator - main + special pool worked.
- Corporation Tax calculator - the CT bill AIA reduces.
- Self-employed expenses checklist - revenue vs capital distinction.
- R&D tax credit calculator - separate relief for R&D capex.
- UK Corporation Tax rates - marginal relief 26.5% effective on £50k-£250k.
- EV company car tax - 100% FYA on electric cars (separate from AIA).
- LTD company closure / MVL - on closure, undeducted capex balances are written off.