How the Annual Investment Allowance is calculated

Q: What does a full calculation look like?

Illustration only. Sam starts trading as a sole trader on 1 July 2026 and draws up her first accounts to 31 March 2027, a 9 month period. Her maximum AIA is £750,000. She spends £600,000 on electrical and heating systems in new premises (special rate) and buys a new van for £300,000. AIA on the special rate items: £600,000. AIA on part of the van: £150,000, which uses up the £750,000. The remaining £150,000 of the van qualifies for the 40% first year allowance: £60,000. The £90,000 balance goes into the main pool for writing down allowances from the next period. Total allowances for the period are £810,000. Had she ignored the 40% allowance and pooled the £150,000, she would have had a writing down allowance of £150,000 × 14% × 9/12 = £15,750, because writing down allowances are also scaled for a short period (CA23220).

The Annual Investment Allowance (AIA) gives a 100% deduction for most plant and machinery other than cars, up to £1 million of spending in a chargeable period. The £1 million is scaled up or down when the period is longer or shorter than a year, it can only be used in the period the expenditure is incurred, and any unused amount is lost rather than carried forward.

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Who can claim the AIA?

The AIA is in sections 38A and 51A to 51N of the Capital Allowances Act 2001 (CAA 2001). It must be claimed by a qualifying person, which HMRC’s Capital Allowances Manual at CA23082 defines as an individual, a partnership whose members are all individuals, or a company. Trusts and mixed partnerships with a company member cannot claim it.

Sole traders and partnerships using the cash basis can only claim capital allowances on business cars, so they deduct equipment as an expense instead. This page concentrates on how the allowance is calculated and timed; for the wider picture see our guide to capital allowances and the overview of the Annual Investment Allowance.

What qualifies and what is excluded?

AIA qualifying expenditure is expenditure on plant or machinery for a qualifying activity that you own as a result of the spending, made by a qualifying person and not caught by a general exclusion (CA23084). It covers special rate items such as integral features and long life assets as well as main rate items. HMRC’s examples include computers and office furniture, vans, lorries and diggers, shop fittings, kitchen and bathroom fittings, business machines, agricultural machinery and fibre optic cabling. If you are unsure whether an item is plant at all, see what counts as plant and machinery.

No AIA is available for expenditure:

in the chargeable period in which the business permanently stops;
on a car, as defined in CAA 2001 s268A (vans and lorries are not cars);
wholly for a North Sea ring fence trade;
on an asset provided in connection with a change in someone else’s business where getting an AIA is a main benefit;
on an asset received as a gift, or one you owned for another purpose before bringing it into the business.

The anti avoidance rules also deny the AIA for transactions with connected persons and for arrangements whose main purpose is a tax advantage (CAA 2001 ss214, 215, 217 and 218A). Cars go into a pool and get writing down allowances based on their emissions; see capital allowances on cars.

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When is the expenditure incurred?

The AIA is given for the chargeable period in which the expenditure is incurred (s51A(2)). Under CAA 2001 s5, expenditure is incurred when there is an unconditional obligation to pay, even if payment is due later. Two exceptions shift the date:

if payment is not required until more than four months after the obligation arises, the expenditure is incurred on the date payment is due (s5(5));
if the obligation arises from a certificate or similar event within one month after the period end, and the asset already belongs to you at the period end, the expenditure is treated as incurred just before the period end (s5(4)).

Spending before trading starts is treated as incurred on the first day of trading under s12. Under hire purchase, gov.uk guidance says you can claim for all the capital payments under the contract once you start using the item, but not the interest.

How is the £1 million adjusted for short and long periods?

Section 51A(5) fixes the maximum at £1,000,000, the figure substituted by Finance (No. 2) Act 2023. Section 51A(6) says that if the chargeable period is more or less than a year, the maximum is proportionately increased or reduced. Gov.uk gives the example of a 9 month period: 9/12 × £1,000,000 = £750,000.

For a company, a corporation tax accounting period cannot be longer than 12 months. If a company draws up accounts for 15 months, it files two returns, and each accounting period has its own AIA, time apportioned where the period is short. For a sole trader or partnership, the chargeable period follows the period of account, so a long period can carry a larger allowance: CA23085 gives an 18 month period with a maximum of £1.5 million. Gov.uk warns that the rules differ where a period of account is longer than 18 months or there is a gap or overlap between periods.

HMRC accepts apportionment on a daily or monthly basis where the period consists of whole calendar months; otherwise a daily basis is required (CA23085).

What happens when a period straddles a change in the limit?

The AIA has been £1 million since 1 January 2019 and the limit is now written into s51A(5) rather than set by temporary rules, so straddling periods mainly arise when reviewing older returns. The method is to apportion each limit to the part of the period it covers. In HMRC’s example at CA23085, Ryan Ltd’s year to 30 September 2019 had a maximum of 3/12 × £200,000 plus 9/12 × £1 million, so £800,000, but no more than £200,000 could be claimed on spending in the first three months.

A current straddling issue is the writing down allowance rather than the AIA. The main rate fell from 18% to 14% for chargeable periods beginning on or after 1 April 2026 for corporation tax and 6 April 2026 for income tax, and a period that spans the change uses a hybrid rate (CA23220). Any spending above the AIA falls into that calculation.

How should the allowance be allocated?

You may claim all, part or none of the AIA (s51A(7)) and allocate it against any qualifying expenditure as you choose. HMRC expects taxpayers to set it against the expenditure that would otherwise get the lowest rate of relief (CA23084), which usually means special rate items first, because the special rate pool only gets 6% a year. See integral features and the special rate pool.

You can split a single asset between the AIA and another allowance. Companies buying new main rate assets can use full expensing, which is not capped, and keep the AIA for special rate or second hand items. From 1 January 2026, new main rate plant that is not a car can also get a 40% first year allowance, and unlike full expensing this is not limited to companies; see the 40% first year allowance.

Where an asset is also used privately by a sole trader or partner, the AIA is reduced to a just and reasonable amount under s205.

What does a full calculation look like?

Illustration only. Sam starts trading as a sole trader on 1 July 2026 and draws up her first accounts to 31 March 2027, a 9 month period. Her maximum AIA is £750,000. She spends £600,000 on electrical and heating systems in new premises (special rate) and buys a new van for £300,000.

AIA on the special rate items: £600,000.
AIA on part of the van: £150,000, which uses up the £750,000.
The remaining £150,000 of the van qualifies for the 40% first year allowance: £60,000.
The £90,000 balance goes into the main pool for writing down allowances from the next period.

Total allowances for the period are £810,000. Had she ignored the 40% allowance and pooled the £150,000, she would have had a writing down allowance of £150,000 × 14% × 9/12 = £15,750, because writing down allowances are also scaled for a short period (CA23220).

What happens when an asset that had AIA is sold?

The disposal proceeds go into the relevant pool. If the pool has no balance, the proceeds create a balancing charge, and you cannot net them off against the cost of a replacement asset (CA23086). Gov.uk also reminds businesses that the AIA is not available in the final period, when a balancing charge or allowance is calculated instead. See balancing charges and allowances.

Which mistakes come up most often?

Claiming the full £1 million for a short first period instead of the apportioned figure.
Claiming AIA on cars, including on vehicles that look like vans but meet the car definition.
Claiming in the wrong period because the date of an unconditional obligation was missed, or payment terms were longer than four months.
Netting sale proceeds of old equipment against new purchases.
Assuming each of several businesses you control gets its own £1 million; see sharing the AIA between related businesses.
Using the AIA on new main rate assets in a company when full expensing was available, and leaving special rate spending in the 6% pool.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.