Annual Investment Allowance 2026: £1m limit and 40% FYA

What the Annual Investment Allowance is

The Annual Investment Allowance (AIA) is a capital allowance that lets a business deduct up to £1 million a year of qualifying plant and machinery spend from profits before tax. The limit is set permanently at that level. The relief is available to businesses within the charge to UK tax, including companies, sole traders and partnerships, subject to the applicable rules. Qualifying plant and machinery can include machinery, equipment, computers, office furniture and certain vehicles used in the business. The deduction is made in the accounting period to which the expenditure relates, rather than through a fixed annual payment. The AIA is intended to reduce the taxable profit of the business in the period in which qualifying expenditure is incurred. It is not a tax credit and does not create a payable amount where profits are insufficient. Instead, the allowance operates by reducing the amount on which tax is charged. The £1 million limit generally applies to the business or group entitlement, so the amount available can depend on the structure of the business and any connected or related parties.

Not all expenditure qualifies for the AIA. Cars are excluded, as are buildings and gifts. The allowance is directed at plant and machinery rather than at the acquisition of land or premises. Expenditure on assets that are not plant and machinery, or that fall within an excluded category, does not count towards the £1 million limit for AIA purposes. The exclusions apply even where the asset is used in the business and produces taxable income. A car used for business purposes remains outside the AIA, and expenditure on a building or a gift does not become qualifying because it supports the trade. Capital allowances are calculated by reference to the accounting period and the tax rules that apply to the business. Where an accounting period spans a date on which capital allowance rates change, the period can require apportionment for the relevant writing-down allowance. The AIA limit itself remains at £1 million a year. A business with a period that straddles 1 January 2026 or April 2026 therefore applies the AIA within the existing framework, while the rate change for the main pool is handled separately under the rules for straddling periods. The distinction matters because the AIA is a fixed first-year relief, whereas writing-down allowances apply to pool balances over time. Records of expenditure, asset use and disposal proceeds support the calculation of the allowance and any later adjustment.

AIA vs full expensing vs the new 40% first-year allowance

The AIA, full expensing and the 40% first-year allowance are separate reliefs with different eligibility conditions. The AIA is available to companies, sole traders and partnerships and provides a deduction of up to £1 million a year for qualifying plant and machinery. Full expensing is available to companies within Corporation Tax and provides 100% relief on new main-rate plant and machinery. It also provides a 50% first-year allowance on special-rate assets. Full expensing is not available to sole traders or partnerships because it is a Corporation Tax relief. The reliefs are not cumulative on the same expenditure. A business first identifies expenditure that qualifies for the AIA and applies the £1 million limit. It then applies full expensing or the 40% first-year allowance to qualifying expenditure outside the AIA where the conditions are met. The order matters because the AIA is available across business types, while full expensing is restricted to companies and to defined categories of expenditure. The same asset cannot generate more than one first-year deduction under these provisions. Records need to show which relief is applied to each item of expenditure.

The 40% first-year allowance starts on 1 January 2026 and covers qualifying spend above the AIA. It includes assets held for leasing and excludes cars and second-hand assets. The relief is relevant where full expensing is not available, including for unincorporated businesses and for assets held for leasing. A sole trader or partnership can use the AIA up to £1 million and then apply the 40% first-year allowance to qualifying expenditure above that limit where the conditions are met. A company can use the AIA and full expensing for new main-rate plant and machinery, and the 40% first-year allowance can apply to qualifying expenditure that falls outside full expensing. The 40% rate is not a substitute for the AIA; it operates on the amount above the AIA within the qualifying category. The exclusions for cars and second-hand assets limit the scope. Expenditure must fall within the definition of plant and machinery and must not be caught by an exclusion. The date of expenditure and the date the asset is brought into use can affect the period in which relief is claimed.

The writing-down allowance cut to 14%

The main-pool writing-down allowance falls from 18% to 14% from April 2026. For Corporation Tax the change applies from 1 April 2026, and for Income Tax it applies from 6 April 2026. The main pool contains qualifying plant and machinery expenditure that has not been relieved by the AIA, full expensing or another first-year allowance. The writing-down allowance reduces the pool balance each period and provides tax relief over time. The reduction from 18% to 14% means that assets left in the main pool receive a lower annual allowance after the change. The effect is most relevant to expenditure above the £1 million AIA limit and to assets that do not qualify for a first-year allowance. The rate change does not alter the AIA limit, which remains at £1 million a year. It also does not alter the availability of full expensing for companies or the 40% first-year allowance from 1 January 2026. The main pool rate applies to the unrelieved balance, so the timing of expenditure and claims affects the amount that remains in the pool when the lower rate begins.

An accounting period that straddles the rate change can require a hybrid rate for the main pool. The hybrid rate blends the 18% and 14% rates for the parts of the period before and after the change. For Corporation Tax, the relevant date is 1 April 2026. For Income Tax, the relevant date is 6 April 2026. The hybrid calculation applies to the main-pool writing-down allowance and not to the AIA limit, which remains at £1 million a year. A business with a period ending after the relevant date therefore separates the period into the part before the change and the part after it for the writing-down allowance. The lower 14% rate applies to the main pool after the change. Expenditure above the AIA that is not covered by full expensing or the 40% first-year allowance remains in the main pool and is affected by the lower rate. The change increases the importance of identifying whether expenditure qualifies for a first-year allowance, because the amount left in the main pool receives the reduced rate. The rules apply by reference to the tax and accounting period of the business.

Worked examples for a sole trader and a limited company

A sole trader that spends £150,000 on qualifying plant and machinery can set the full amount against profits using the AIA, because the spend is within the £1 million annual limit. The same result applies to a limited company that spends £150,000 on qualifying plant and machinery. The AIA covers the expenditure before any other first-year relief is needed. The deduction is £150,000 in the accounting period to which the expenditure relates, subject to the rules on when expenditure is incurred and the asset is brought into use. The remaining AIA capacity for the business is £850,000, calculated as £1 million less £150,000. That remaining capacity can be used for other qualifying plant and machinery expenditure in the same period, subject to the shared limit rules for groups and related businesses. The example uses the AIA only. Full expensing and the 40% first-year allowance do not need to be applied to the £150,000 because the AIA already covers the qualifying spend. The result is the same for the sole trader and the company at this level of expenditure in the same accounting period.

A limited company that spends £1.4 million on new main-rate plant and machinery can apply the AIA to the first £1 million. The remaining £400,000 is above the AIA limit. If the conditions for full expensing are met, the company can apply 100% full expensing to that £400,000. The total deduction is then £1 million under the AIA plus £400,000 under full expensing, giving £1.4 million. The calculation uses only the AIA and full expensing. The 40% first-year allowance is not needed for the £400,000 if full expensing applies to the expenditure. If full expensing does not apply, the treatment of the £400,000 depends on which relief and pool the expenditure qualifies for. The example assumes all of the £1.4 million is new main-rate plant and machinery and that the company meets the full expensing conditions. The arithmetic is £1,000,000 plus £400,000 equals £1,400,000. The order is AIA first, then full expensing on the amount above the AIA, within the limits of each relief. The AIA limit is £1 million a year, so the amount above it is £400,000. Full expensing provides 100% relief on new main-rate plant and machinery for companies. The result is a deduction equal to the whole £1.4 million spend in this example.

Group companies, partnerships and the shared limit

The £1 million AIA limit is shared among companies in a group and among related businesses. A group of companies does not obtain a separate £1 million AIA for each company. The entitlement is allocated across the group within the single limit. Related businesses under common control can also be subject to the shared limit. The purpose is to prevent multiple businesses within the same economic group from each claiming the full £1 million. The shared limit applies to the total qualifying expenditure of the group or related businesses for the accounting period. A company within a group therefore needs to identify the group allocation before calculating its own AIA claim. The same principle can apply to partnerships and to businesses under common control. The allocation can affect the amount of expenditure that is relieved by the AIA and the amount that falls to be considered for full expensing, the 40% first-year allowance or the main pool. Records of group structure and expenditure allocation support the calculation. The limit is not multiplied by the number of companies or partners involved.

A partnership can claim the AIA, but the partnership is treated as a single business for the £1 million limit. The limit is not divided among the partners as separate businesses for this purpose. Mixed partnerships, which include both individual and corporate partners, cannot claim the AIA under the rules described here. That restriction means a mixed partnership does not use the AIA in the same way as an ordinary partnership or a company. The denial applies to the partnership's claim, so the partners do not obtain the AIA through the mixed partnership structure. Where a partnership is not mixed, the partnership calculates the AIA on its qualifying plant and machinery expenditure and allocates the tax relief among the partners according to their profit-sharing arrangements. The shared limit can also interact with group rules where the partners have other related businesses. The AIA is claimed at the level of the business, and the allocation among partners follows the partnership's profit-sharing arrangements. The £1 million limit remains the same; the issue is which business can claim it and how the claim is shared.

How asset finance affects who claims capital allowances

The form of asset finance affects which party can claim capital allowances. Under hire purchase, the business claims allowances as if it owned the asset. The business therefore treats the asset as its own plant and machinery for capital allowance purposes, subject to the rules and the terms of the agreement. Under leasing, the lessor usually claims the capital allowances. That applies to finance leases and operating leases where the lessor retains the capital allowance entitlement. Under a loan used to buy an asset, the borrower owns the asset and can claim capital allowances if the expenditure qualifies. The distinction turns on ownership and the legal nature of the agreement rather than on the commercial label used by the parties. The person who claims the allowance is the person entitled to the capital allowance under the relevant rules. A hire purchase agreement is treated differently from a lease because the business is treated as acquiring the asset. A loan is different again because the asset is purchased by the borrower and the lender provides finance. The agreement terms determine the treatment, not the name given to the facility.

Timing can affect who claims and when. The date an agreement starts is not necessarily the date from which allowances are calculated. The relevant question is when expenditure is incurred and when the asset is brought into use, subject to the rules for hire purchase and long funding leases. For hire purchase, the business claims as if it owned the asset, and the timing follows the rules for the agreement and the asset's use. For leasing, the lessor usually claims, so the lessee does not claim the capital allowances. A long funding lease can change the position, because the lessee may be treated as the person entitled to claim capital allowances rather than the lessor. The classification of the lease therefore matters. A finance lease and an operating lease can have different capital allowance consequences depending on the terms and the accounting treatment. A loan does not change the ownership of the asset, so the borrower remains the person able to claim if the asset qualifies. The date the asset is brought into use can affect the period in which the allowance is claimed.

Disposals, balancing charges and timing purchases

Selling an asset that has been relieved by the AIA or full expensing can trigger a balancing charge. The disposal value is brought into the capital allowance calculation. If the asset was fully relieved, the proceeds can create a charge that recovers part or all of the relief previously given. The charge is not a separate tax; it adjusts the capital allowance position in the period of disposal. For assets in the main pool, the disposal value reduces the pool balance. If the disposal value exceeds the pool balance, a balancing charge can arise. The same principle applies to assets relieved by the 40% first-year allowance where the rules require a disposal adjustment. Records of the original claim and the disposal proceeds are needed to calculate the adjustment. The treatment depends on the relief originally claimed and the pool to which the asset belonged. A sale of an asset that qualified for full expensing can therefore affect the tax position even though no writing-down allowance was claimed on the asset. The charge can arise in the same accounting period as the disposal.

Timing of purchases can affect the accounting period in which relief is claimed. The relevant date is generally when expenditure is incurred and when the asset is brought into use, subject to the rules for the relief. A purchase made near the end of an accounting period may fall in that period or the next period depending on the facts. The AIA, full expensing and the 40% first-year allowance each have conditions that can affect the period of claim. The main-pool writing-down allowance is calculated on the pool balance at the end of the period. A purchase that is not covered by a first-year allowance increases the pool and is relieved through writing-down allowances over time. The rate change to 14% from April 2026 can affect the amount of relief for expenditure that remains in the main pool. The timing of a disposal can also affect the pool balance and any balancing charge. The tax and accounting period of the business determines how the dates are applied. Records of invoices, delivery, use and disposal support the allocation of expenditure to the correct period.

Frequently asked questions

Is the Annual Investment Allowance still £1 million?

Yes, the AIA was set permanently at £1 million.

Can a sole trader claim full expensing?

No, full expensing is for companies; sole traders use AIA and from 1 January 2026 the 40% FYA.

Can AIA be claimed on assets bought on hire purchase?

Yes, under HP the business is treated as owning the asset for capital allowances.

Does AIA apply to cars?

No, cars are excluded from AIA and from the new 40% FYA.

When does the 14% writing-down allowance start?

1 April 2026 for Corporation Tax and 6 April 2026 for Income Tax.