The AIA turns a big equipment purchase into an immediate tax deduction rather than relief dribbled out over many years.
For most small businesses, the £1 million Annual Investment Allowance is so generous that it makes a complicated-sounding area of tax simple: buy qualifying equipment, deduct the whole cost from your profit this year, move on. The cap is set far above anything a typical sole trader will ever spend, which is precisely the point.
The AIA is the headline form of capital allowances. Where ordinary writing-down allowances spread relief over many years at 18% or 6%, the AIA front-loads it: the entire qualifying cost comes off your taxable profit in the year of purchase. You only fall back on the slower writing-down pools if your spending in a year exceeds the £1 million ceiling, or for assets the AIA does not cover.
Qualifying assets are plant and machinery: tools, computers, machinery, office furniture, vans, and integral features of a building such as wiring and heating systems. The standout exclusion is cars, which always go into the emissions-based capital allowance pools instead.
Suppose Ade sets up a joinery business as a sole trader in 2025/26 and spends £35,000 on machinery, a workbench, hand tools and a computer — all qualifying plant and machinery. His trading profit before capital allowances is £52,000.
Because his £35,000 spend is comfortably under the £1 million AIA limit, he claims the full £35,000 in year one. His taxable profit falls to £52,000 − £35,000 = £17,000.
After the £12,570 Personal Allowance, he is taxed on just £4,430 instead of the £39,430 he would have faced without the AIA. The allowance has, in effect, deferred a large chunk of his tax until the business is generating steadier profits — exactly the cash-flow help a new venture needs.
A limited company spending the same £35,000 would deduct it from profits before corporation tax; model that effect with the corporation tax calculator.
For years the AIA limit lurched between £25,000 and £1 million through a series of temporary measures, creating traps when purchases straddled the change dates. Since 1 April 2023 the limit has been permanently £1 million, removing that uncertainty. The cap applies to your accounting period, so a business with a shorter-than-12-month period gets a proportionately reduced allowance — for example, a six-month period would have a £500,000 limit.
The Annual Investment Allowance is the rare tax rule that is genuinely simple for small businesses: spend on kit, deduct it in full, because almost no one hits the million-pound ceiling.
Limited companies also have access to full expensing, a separate 100% relief on new and unused qualifying plant and machinery with no upper cap, introduced to sit alongside the AIA. Sole traders and partnerships cannot use full expensing — the AIA remains their route. Meanwhile, sole traders who use the cash basis of accounting generally deduct most equipment purchases as ordinary costs when paid, rather than claiming the AIA, the main exception being cars. Choosing your accounting basis therefore affects how, and when, equipment relief lands.
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