Both full expensing and the annual investment allowance (AIA) give a company a 100% deduction for plant and machinery, but they differ. Full expensing has no monetary limit but only covers new and unused main rate plant, and a later sale triggers an immediate balancing charge. The AIA is capped at £1 million a year shared across a group, yet it covers second hand assets and special rate items at 100%.

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What are the two reliefs?

The AIA, in sections 38A and 51A to 51N of the Capital Allowances Act 2001 (CAA 2001), gives 100% relief on qualifying plant and machinery expenditure up to an annual amount, which gov.uk confirms has been £1 million since 1 January 2019. Sole traders, partnerships of individuals and companies can all claim it. A partnership with a company member cannot (CA11145).

Full expensing is a first year allowance under section 45S. It applies to expenditure incurred on or after 1 April 2023 by a company within the charge to Corporation Tax on plant or machinery that is unused and not second hand. The table in section 52 gives 100% for main rate expenditure and 50% for special rate expenditure under the same section. Finance Act 2024 section 1 removed the original end date of 31 March 2026, so the relief is permanent. For the background to each relief, see our pages on full expensing and the annual investment allowance.

How do the two compare at a glance?

Feature Full expensing AIA
Who can claim Companies only (including the notional company of a corporate or mixed partnership) Individuals, partnerships of individuals, companies
Annual limit None in section 45S £1 million, time apportioned and shared in a group
Second hand assets Not eligible Eligible
Special rate assets 50% allowance only 100%
Plant for leasing Excluded, except background plant in a let building Not excluded
Cars Excluded Excluded
Year the trade ceases Excluded Excluded
On disposal Immediate balancing charge Proceeds deducted from the pool

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Can either relief be claimed on second hand assets?

Only the AIA. Section 45S requires plant that is unused and not second hand. HMRC accepts at CA23174AB that buying from a dealer, or limited use for testing, delivery or demonstration, does not spoil the claim, and that new parts used to upgrade an existing machine can qualify. A used machine, or fixtures acquired with a second hand building, does not.

The AIA has no such condition. Gov.uk lists only business cars, items owned for another reason before being used in the business, and gifts as items it cannot be claimed on. CA23084 describes the AIA as available on virtually all qualifying plant and machinery expenditure. A company buying used equipment should therefore direct its AIA there.

How does the £1 million limit work?

The AIA is given per chargeable period. CA23085 confirms the limit is increased or reduced for periods of more or less than a year, so a six month period gets £500,000, and that unused AIA cannot be carried forward. Gov.uk adds that the AIA can only be claimed in the period the item was bought, which is the contract date if payment is due within four months, or the date payment is due if later.

Section 45S contains no monetary cap, so a company with large main rate spending relies on full expensing for the part that the AIA cannot cover. The AIA is more valuable on special rate spending, where full expensing only gives 50%. HMRC expects businesses to set the AIA against the spending that would otherwise get the lowest rate (CA23084), and the same expenditure cannot be relieved twice. The detail of the 50% rate is in the 50% first year allowance for special rate assets.

How is the AIA shared in a group?

CA23088 sets out four restrictions for companies:

  1. a single company gets one AIA, even if it has a trade and a property business;
  2. companies in a group, as defined by the parent undertaking test in section 1162 of the Companies Act 2006, share one AIA;
  3. groups that are related and under common control share one AIA;
  4. other related companies under common control share one AIA.

Companies are related if one or both of the shared premises condition and the similar activities condition are met (CA23088 and CA23090). The shared allowance can be allocated between the companies in any way they choose, and the test is applied by reference to chargeable periods ending in the same financial year. In HMRC’s example, if a subsidiary claims £200,000 for its period ending 31 March 2024, its parent has at most £800,000 for its period ending 31 December 2023.

Full expensing needs no allocation. Each company claims on its own qualifying spending, with no group limit in section 45S.

What happens when the asset is sold?

This is the main practical difference. For full expensing, section 59A creates a balancing charge in the period of disposal equal to the relevant proportion of the disposal value. Where full expensing was claimed on the whole cost, the proportion is one, so all the proceeds are taxed at once and nothing goes to the pool (CA23174AD). In HMRC’s example, a machine bought for £10 million and fully expensed is sold for £4 million, giving a £4 million balancing charge.

An asset relieved by the AIA sits in the pool at zero, as gov.uk explains, and its sale proceeds are deducted from the pool. CA23230 shows a partnership with a £12,000 pool selling old computers for £3,000: the proceeds reduce the pool rather than being taxed outright, and a balancing charge only arises if disposals exceed the pool. Our guide to balancing charges and allowances explains the pool mechanics.

Both reliefs eventually tax the proceeds, but a company that expects to sell assets while its main pool is large may prefer the AIA on those items to spread the tax, and keep full expensing for assets it will hold until they are scrapped.

What does a combined claim look like?

Illustration only. Two companies in the same group have years ending in the same financial year and spend:

  • Company A: £800,000 on new production machinery and £300,000 on second hand forklifts;
  • Company B: £600,000 on a new heating and lighting system, which is special rate.

The group allocates £600,000 of AIA to Company B’s special rate spend and £300,000 to Company A’s forklifts. Company A fully expenses its £800,000 of new machinery. Total first year relief is £1.7 million and £100,000 of AIA is unused. Had Company B used the 50% allowance instead, it would have deducted only £300,000 in the first year.

What mistakes come up most often?

  • Claiming full expensing in a sole trader or partnership return. The 40% first year allowance is the alternative for new main rate plant above the AIA.
  • Full expensing claims on used plant, beyond the limited testing, delivery or demonstration use HMRC accepts.
  • Each company in a group claiming a full £1 million AIA.
  • Spending AIA on main rate plant that could be fully expensed while special rate items get only 50%.
  • Leaving out the balancing charge when fully expensed plant is sold or scrapped.
  • Claiming either relief on a car; see capital allowances on cars.

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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.