AIA vs Writing Down Allowance: How to Choose the Most Tax-Efficient Route

The annual investment allowance gives a company 100% tax relief on qualifying plant and machinery in the year of purchase, while a writing down allowance spreads relief at 14% a year for main pool assets and 6% a year for special rate assets, so the annual investment allowance is almost always the better route where a company has taxable profit to shelter. The exception matters more than most directors expect: claiming an allowance against profit already covered by losses, or against profit taxed at 19% when next year's profit will be taxed at 26.5%, wastes relief that cannot be recovered. Blue Tick Accountants, a Guildford-based UK tax advisory and accountancy practice, works through this choice for company directors every year end. This article explains how each allowance works, when to restrict a claim deliberately, and the order in which a capital allowances limited company claim should be built in 2026/27.

Key Takeaways

• The annual investment allowance gives a 100% deduction on up to £1,000,000 of qualifying plant and machinery per 12 month accounting period, pro-rated for shorter periods.
• The main pool writing down allowance for companies fell from 18% to 14% from 1 April 2026, so expenditure that misses a 100% allowance now unwinds substantially more slowly.
• The special rate pool writing down allowance remains 6% a year, meaning integral features left in that pool take over 30 years to attract most of their relief.
• Capital allowances are optional: a company may claim less than the maximum and carry the unclaimed balance forward in the pool.
• Corporation tax is 19% on profits up to £50,000 and 25% above £250,000 in 2026/27, with an effective marginal rate of 26.5% in between, so moving a claim into a marginal rate year is worth 7.5 pence in every pound.

How does the annual investment allowance differ from a writing down allowance?

The annual investment allowance is a 100% first-year deduction capped at £1,000,000, while a writing down allowance is an annual percentage deduction on a reducing balance pool that continues indefinitely until the pool is exhausted. Both are claimed under the Capital Allowances Act 2001, and both reduce taxable profit rather than the tax bill itself.

The practical difference is timing, and timing is worth real money. A company buying £40,000 of production equipment can deduct the full £40,000 in the year of purchase under the annual investment allowance UK 2026 rules, saving £10,000 in corporation tax at 25%. Left in the main pool at 14%, the same asset produces a £5,600 deduction in year one, £4,816 in year two and £4,142 in year three, with £25,442 still unrelieved after three years.

There is no cliff edge between the two. Expenditure that exceeds the AIA £1 million limit, or that does not qualify for it, enters the appropriate pool and attracts writing down allowances from then on.

When is a writing down allowance the better choice?

A writing down allowance is the better choice when the company has no profit to relieve this year, or when relief is worth more in a later year. Capital allowances are not compulsory, and a company may claim any amount from nil up to the maximum available.

The clearest case is a loss-making year. Claiming £200,000 of annual investment allowance in a year the company already has a trading loss enlarges the loss, and while losses carry forward, the pool balance has gone. Restricting the AIA leaves the expenditure in the pool, where writing down allowances remain available against future profits.

The second case is rate arbitrage. Corporation tax is 19% on the first £50,000 of profit and 25% above £250,000, with marginal relief creating an effective 26.5% rate in between. A company expecting £45,000 of profit this year and £180,000 next year gains 7.5 pence in every pound by restricting the claim now and taking relief against the marginal band next year. Where a company wants to preserve a specific profit figure to support a group relief surrender or a research and development claim, the same lever applies. For a full overview of how the allowances fit together, see our guide to the Annual Investment Allowance.

Worked example: choosing between AIA and writing down allowances

A company with a 31 March 2027 year end buys £120,000 of qualifying plant and machinery and expects taxable profit before capital allowances of £90,000 this year and £260,000 next year.

Claiming the full £120,000 annual investment allowance this year reduces profit to a loss of £30,000. No corporation tax is payable and the £30,000 loss carries forward. Next year's £260,000 profit is relieved by the loss, leaving £230,000, which sits inside the marginal relief band and produces corporation tax of £57,200 across the two years.

Claiming £90,000 of annual investment allowance this year reduces profit to nil, and the remaining £30,000 enters the main pool. Next year's writing down allowance of £4,200 at 14% reduces profit to £255,800. That figure sits above the £250,000 upper limit, so marginal relief is lost altogether and the whole profit is taxed at 25%, giving £63,950 across the two years, with £25,800 still sitting in the pool.

The full claim wins by £6,750, and the reason is the upper limit rather than the allowance itself: restricting the AIA left next year's profit above £250,000 and forfeited marginal relief entirely. Restricting a claim only pays where the deferred relief lands in a band taxed at a higher effective rate, so the profit forecast decides the answer, not the asset.

In what order should a company claim its capital allowances?

A company should claim in the order that gives 100% relief first and preserves the annual investment allowance for expenditure that has no other route to full relief.

Full expensing gives 100% relief on new and unused main rate plant and machinery bought by a company, with no monetary cap, so it should be used first wherever it applies. The 40% first-year allowance introduced from 1 January 2026 covers new main rate assets that fall outside full expensing, including assets bought for leasing.

The annual investment allowance should then be directed at the expenditure neither of those routes reaches: second-hand assets, and special rate expenditure such as integral features, electrical systems, heating, air conditioning and lifts. Special rate expenditure is the highest priority of all, because the alternative is 6% a year on a reducing balance, which is worth very little in present value terms.

Anything left over falls into the main pool at 14% or the special rate pool at 6%. Cars never qualify for the annual investment allowance, though new zero emission cars attract a separate 100% first-year allowance on expenditure incurred up to 31 March 2027 for companies and 5 April 2027 for unincorporated businesses.

What are the common mistakes in a capital allowances claim?

The most expensive mistake is spending the annual investment allowance on assets that would have received 100% relief anyway through full expensing, leaving second-hand and special rate expenditure to crawl through the pools. It is a sequencing error that costs nothing to avoid.

Missing integral features on a commercial property purchase is the second. Land and the building structure do not qualify, but the electrical, heating, ventilation and lift systems inside it do, and a capital allowances survey is normally needed to apportion the price. On an £800,000 commercial building, unclaimed integral features of £160,000 represent £40,000 of corporation tax relief at 25%.

Third is the shared limit. The AIA £1 million allowance is shared between companies under common control that are related by business activity or shared premises, so a director running three companies from one site has one allowance rather than three. Fourth is timing: expenditure is incurred when the obligation to pay becomes unconditional, not when cash leaves the bank, and assets bought on hire purchase qualify once brought into use.

Frequently Asked Questions

Is the annual investment allowance always better than a writing down allowance?

Not always. The annual investment allowance gives 100% relief immediately, which is better whenever the company has taxable profit to shelter. Where the company is loss-making, or expects to move into the 26.5% marginal rate band next year, restricting the claim and taking writing down allowances later can produce more relief overall.

What is the writing down allowance rate for companies in 2026/27?

The main pool writing down allowance for companies is 14% a year on a reducing balance from 1 April 2026, reduced from the previous 18%. The special rate pool, which covers integral features, long life assets and thermal insulation, remains at 6% a year on a reducing balance.

Can a company choose to claim less than the full annual investment allowance?

Yes. Capital allowances are claimed, not automatic, and a company may claim any amount between nil and the maximum available. Unclaimed expenditure stays in the relevant pool and attracts writing down allowances in later periods, which is often the right answer in a loss-making year.

Does the £1,000,000 annual investment allowance apply to every accounting period?

The £1,000,000 annual investment allowance applies to each 12 month accounting period and is pro-rated for shorter periods. A company preparing accounts for a nine month period has an allowance of £750,000. Companies under common control or within a group share a single £1,000,000 limit between them.

Should I claim AIA or full expensing on new equipment?

Claim full expensing first on new and unused main rate plant and machinery, because it gives 100% relief with no monetary cap and preserves the annual investment allowance. The annual investment allowance should then be directed at second-hand assets and special rate expenditure, which have no other route to 100% relief.

How much is a capital allowances claim worth in corporation tax?

A capital allowances claim is worth 19% to 26.5% of the qualifying expenditure, depending on the company's profit level in 2026/27. A £100,000 claim saves £25,000 for a company taxed at the 25% main rate, £26,500 for a company in the marginal band, and £19,000 for a company with profits below £50,000.

How Blue Tick Can Help

Blue Tick Accountants reviews capital expenditure before a year end rather than after it, sequencing full expensing, the 40% first-year allowance, the annual investment allowance and writing down allowances so that relief lands in the years where it is worth the most. The practice also handles integral features apportionments on commercial property purchases, where unclaimed allowances routinely run into six figures. Head to our website and book a meeting now.

Conclusion

Take the 100% allowance whenever the company has profit to relieve, and reserve the annual investment allowance for second-hand and special rate expenditure that has no other route to full relief. Where profits are low this year and higher next year, restricting the claim deliberately is worth doing rather than a sign of a mistake. Review capital spending before the year end closes, because the difference between 100% now and 14% a year is decided by the claim, not by the purchase.

About the Author

This guide was written by Leon, founder of Blue Tick Accountants, a Guildford-based UK tax advisory and accountancy practice that advises limited company owners, landlords and the self-employed across the UK on corporation tax, capital allowances and profit extraction. It was last reviewed for the 2026/27 tax year.

This article is intended for general informational purposes only and does not constitute tax, legal, or financial advice. Tax rules are subject to change and their application will depend on your individual circumstances. You should always seek advice from a qualified professional before taking action. Blue Tick Accountants accepts no liability for decisions made on the basis of this content.

Related reading: Capital Allowances Year-End Planning: Timing Purchases to Maximise Relief.

Related reading: Second-Hand Assets and Capital Allowances: What Limited Companies Can Claim.