Buy qualifying equipment and you can deduct 100% of the cost from your profits straight away, up to £1 million a year. Here is how the AIA works for sole traders and companies in 2025/26.
The Annual Investment Allowance, almost always shortened to AIA, is the most valuable capital allowance most small businesses will ever use. It lets you deduct the entire cost of qualifying equipment from your taxable profits in the year you buy it, rather than dribbling the relief out over many years. For 2025/26 the limit is £1,000,000, a figure made permanent in April 2023, and for the overwhelming majority of sole traders and small companies that ceiling is high enough to cover everything they buy.
Used well, the AIA turns a large equipment purchase into an immediate cut in your tax bill. Used carelessly, it is easy to forget cars are excluded, to misjudge the timing of a purchase around your year end, or to assume the cash basis and the AIA are the same thing. This guide covers the 2025/26 figure, what qualifies, worked examples for a sole trader and a company, and how the AIA sits alongside writing down allowances.
When a business buys equipment expected to last, that cost is capital, not an everyday running expense, so it cannot simply be deducted like rent or stock. Capital allowances are the mechanism that gives tax relief on capital spending instead. The AIA is the most generous of them: it brings the entire relief forward into year one.
The cash effect is real. A sole trader paying 40% tax who buys £10,000 of qualifying machinery and claims the AIA reduces their taxable profit by £10,000, cutting their income tax by roughly £4,000, plus a further saving on Class 4 National Insurance. Without the AIA, that relief would arrive in slices of 18% a year and take well over a decade to fully feed through.
The £1,000,000 limit applies per business for each 12-month accounting period. If your accounting period is shorter than 12 months, the limit is reduced proportionally. The limit is also shared across companies under common control in a group, so connected businesses cannot each claim a fresh £1 million.
For almost every reader of this page, the limit is academic; few sole traders or microbusinesses spend anywhere near £1 million on equipment in a year. The practical takeaway is that your qualifying purchases are almost certainly covered in full.
The AIA covers "plant and machinery", which is broader than it sounds. Qualifying items include:
The notable exclusions are:
Confusing a van with a car is a classic error. A van qualifies for the full AIA; a car does not, however essential it is to the business.
Marek runs a joinery business as a sole trader and has a strong year with £62,000 of taxable profit before capital allowances. In March he buys a £14,000 CNC machine and £3,000 of hand tools, all qualifying plant and machinery, totalling £17,000.
He claims the AIA on the whole £17,000. His taxable profit falls from £62,000 to £45,000. Because £45,000 keeps him within the basic-rate band, he avoids tipping a slice of profit into the 40% higher rate, and he also saves Class 4 National Insurance on the £17,000. The sole trader tax calculator lets you see the combined income tax and National Insurance effect of a purchase like this on your own figures.
If Marek had bought the machine a few weeks later, in the next accounting period, the relief would have landed a full year later. For a profitable business near a band threshold, bringing a planned purchase forward (or holding it back) by a few weeks around the year end can make a meaningful difference to when the tax saving arrives. The relief is given in the period the expenditure is incurred, which is usually when you become obliged to pay, not necessarily when you actually pay.
Brightline Ltd, a small marketing company, spends £40,000 on new computers, servers and office fit-out, all qualifying plant and machinery. Its profits before allowances are £120,000.
The company claims the AIA on the full £40,000, reducing taxable profit to £80,000. At the main corporation tax rate, that £40,000 deduction is worth a substantial reduction in the company's tax bill in the same year. The company could alternatively have used full expensing (a separate, uncapped 100% allowance for companies on new main-rate assets), but with spend comfortably under £1 million, the AIA does the job and also covers any second-hand items, which full expensing does not.
If qualifying spend exceeds £1,000,000 in a period, the excess does not lose relief; it simply moves into a capital allowances pool and is relieved more slowly through writing down allowances. The main pool is written down at 18% a year on a reducing-balance basis, and the special rate pool (for integral features and longer-life assets) at 6% a year.
| Relief route | Rate | Applies to |
|---|---|---|
| Annual Investment Allowance | 100% in year 1 | Qualifying spend up to £1m |
| Main pool writing down allowance | 18% per year | Excess and most non-AIA plant |
| Special rate pool writing down allowance | 6% per year | Integral features, long-life assets |
For the full landscape of how these reliefs fit together, including first-year allowances and the cars regime, see the capital allowances overview.
Many sole traders now use the cash basis, where income and expenses are recorded when money actually moves. Under the cash basis, most equipment purchases (everything except cars) are simply treated as ordinary allowable expenses and deducted in full when paid. This achieves an effect almost identical to the AIA without a formal capital allowances claim, which is why a cash-basis sole trader rarely needs to think about the AIA at all, except for cars, which still go through writing down allowances.
Under Making Tax Digital for Income Tax, which begins phasing in from April 2026, capital purchases and the allowances claimed on them are reconciled at your final declaration, while quarterly updates capture the running picture of income and expenses. Keeping clean digital records of equipment purchases through the year makes claiming the right allowance straightforward rather than a January scramble.
The Annual Investment Allowance turns a big equipment bill into an immediate tax cut. For nearly every small business the £1 million ceiling is irrelevant. What matters is remembering cars are out, and that timing a purchase around your year end changes when the relief lands.
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