Annual Investment Allowance in 2026: The Complete Capital Allowances Guide for Companies

The annual investment allowance lets a UK company deduct the full cost of qualifying plant and machinery against taxable profits in the year of purchase, up to £1 million per year for 2026/27, rather than spreading relief over many years. It is the cornerstone of the UK's capital allowances system, and alongside it sits full expensing, the permanent 100% first-year allowance available to companies. Understanding how these two reliefs interact, which assets each covers, and how to sequence your spending is essential if you want to extract the maximum tax value from your capital investment. This guide is written by Blue Tick Accountants, a Guildford-based UK tax advisory and accountancy practice that advises limited company directors on capital allowances.

Key Takeaways

• The annual investment allowance gives a 100% first-year deduction on qualifying plant and machinery, up to £1 million per year for 2026/27.
• The £1 million AIA limit has been fixed since January 2019 and applies per business, not per asset.
• The AIA covers both new and second-hand assets and is available to limited companies, partnerships, and sole traders.
• Full expensing gives a 100% first-year allowance on new main rate assets and 50% on new special rate assets, but only for companies subject to corporation tax and only on brand new equipment.
• Expenditure above the £1 million AIA limit attracts writing down allowances of 18% per year (main rate pool) or 6% per year (special rate pool).
• Claiming full expensing triggers a balancing charge on the full disposal proceeds if the asset is later sold, whereas using the AIA does not.

What Is the Annual Investment Allowance?

The annual investment allowance is a 100% first-year deduction for the cost of qualifying plant and machinery purchased by a business during the accounting period. Rather than claiming relief gradually through writing down allowances over multiple years, a company can offset the full expenditure against its taxable profit immediately.

The current AIA limit is £1 million per year. This threshold has been fixed at this level since January 2019 and remains unchanged for 2026/27. It applies per business rather than per asset, meaning a company investing £1 million in qualifying equipment in a single year can deduct the entire cost from its profits in that period.

The AIA is available to limited companies, partnerships, and sole traders alike. It is not restricted to any particular sector and applies to most types of plant and machinery, from manufacturing equipment to office furniture and computer hardware.

Which Assets Qualify for the AIA?

Qualifying plant and machinery is a broad category covering the physical assets a business uses to carry on its trade: machinery, tools, commercial vehicles, computer equipment, office furniture, fixtures, and many integral features within business premises such as heating systems, electrical installations, and air conditioning.

Crucially, the AIA applies to both new and second-hand assets. A company purchasing used machinery or refurbished equipment can still claim the full 100% deduction, provided the asset is used for business purposes.

Assets that do not qualify for the AIA include:

• Cars (which follow their own capital allowances rules based on CO2 emissions)
• Assets acquired in the final accounting period before a business ceases trading
• Items purchased from a connected party or gifted to the business
• Assets that are not used for the purposes of the trade

Where expenditure exceeds the £1 million AIA limit, the excess falls into the relevant capital allowances pool and attracts writing down allowances instead: 18% per year for the main rate pool, or 6% per year for the special rate pool (which covers assets such as long-life machinery and integral features).

How Does Full Expensing Work Alongside the AIA?

Full expensing is a permanent relief for limited companies, introduced from April 2023, that provides a 100% first-year allowance on qualifying new main rate plant and machinery and a 50% first-year allowance on qualifying new special rate assets.

There are two important distinctions from the AIA. First, full expensing applies only to brand new assets, not second-hand equipment. Second, it is available only to companies subject to corporation tax, not to partnerships or sole traders.

A worked example illustrates the value of full expensing at the special rate. A limited company installs a new industrial heating system costing £60,000. As an integral feature, this falls into the special rate pool. Under full expensing, the company claims a 50% first-year deduction of £30,000 immediately. The remaining £30,000 enters the special rate pool and is then written down at 6% per year. Without full expensing, the company would have deducted only £3,600 (6% of £60,000) in year one.

How Do the AIA and Full Expensing Interact?

For new main rate assets the AIA and full expensing produce the same 100% deduction in year one, so the choice between them is largely administrative, but they differ on second-hand assets, special rate assets, and what happens on disposal. The practical answer depends on your mix of assets.

For new main rate assets such as manufacturing machinery or computer equipment, full expensing and the AIA produce the same tax result: a 100% deduction in year one. The choice between them is largely administrative. However, there is a notable exception: if a company claims full expensing and later sells the asset, a balancing charge arises on the full disposal proceeds. If the AIA was used instead, there is no balancing charge on disposal because the asset was absorbed into the pool.

For second-hand assets, only the AIA applies. Full expensing is not available.

For special rate assets, full expensing delivers 50% in year one. The AIA can deliver 100%, but it draws from your £1 million annual limit. Companies with significant special rate expenditure may therefore prefer to apply the AIA to these assets and use full expensing for new main rate assets, preserving the AIA headroom for second-hand purchases.

How Can You Maximise Your Capital Allowances Relief in 2026/27?

The most effective way to maximise your capital allowances is to allocate AIA headroom to second-hand assets first, use full expensing for new main rate assets you plan to keep, and time expenditure to fall within the same accounting period. With two powerful reliefs available, a structured approach can generate meaningful tax savings.

Prioritise AIA for second-hand assets. Since full expensing does not apply to used equipment, the AIA is the only route to a 100% deduction. Allocate AIA headroom here first if your spending includes a mix of new and second-hand items.

Use full expensing for new main rate assets where disposal is unlikely. If you plan to hold the asset long-term, full expensing is straightforward and does not consume your AIA limit.

Consider timing of expenditure. If you expect significant capital investment in the coming year, planning purchases to fall within the same accounting period can concentrate relief and reduce your corporation tax bill sooner.

Check connected-party rules. Transactions between connected companies or between a company and its director can restrict or eliminate capital allowances. Always verify the position before structuring an intra-group transfer.

A straightforward planning example: a company spends £800,000 on new CNC machinery (main rate, new) and £150,000 on second-hand tooling. It claims full expensing on the £800,000 (no AIA used), then claims AIA on the £150,000 second-hand tooling. Result: 100% relief on the full £950,000 in year one, with the £1 million AIA limit largely intact for any further investment.

Frequently Asked Questions

What is the Annual Investment Allowance limit for 2026/27?

The Annual Investment Allowance limit for 2026/27 is £1 million per year. This threshold has been fixed since January 2019 and remains unchanged. It applies per business rather than per asset, so a company can deduct the full cost of up to £1 million of qualifying plant and machinery from its profits in a single accounting period.

Can I claim the AIA on second-hand equipment?

Yes, the Annual Investment Allowance applies to both new and second-hand assets. A company purchasing used machinery or refurbished equipment can still claim the full 100% deduction, provided the asset is used for business purposes. This is a key difference from full expensing, which is only available on brand new assets.

What is the difference between the AIA and full expensing?

The AIA gives a 100% deduction on up to £1 million of new or second-hand qualifying plant and machinery and is available to companies, partnerships, and sole traders. Full expensing gives 100% on new main rate assets and 50% on new special rate assets, but only for companies subject to corporation tax and only on brand new equipment.

Does full expensing trigger a balancing charge?

Yes, if a company claims full expensing and later sells the asset, a balancing charge arises on the full disposal proceeds. If the AIA was used instead, there is no balancing charge on disposal because the asset was absorbed into the relevant capital allowances pool. This distinction matters when an asset is likely to be sold.

What happens to spending above the £1 million AIA limit?

Expenditure above the £1 million AIA limit falls into the relevant capital allowances pool and attracts writing down allowances instead. This is 18% per year for the main rate pool, or 6% per year for the special rate pool, which covers assets such as long-life machinery and integral features. Full expensing may also apply to qualifying new assets.

How Blue Tick Can Help

Blue Tick Accountants advises company directors on structuring capital expenditure to maximise first-year relief, sequencing the annual investment allowance and full expensing to avoid balancing charges and preserve AIA headroom. Capital allowances are one of the most underused reliefs available to limited companies, and Blue Tick Accountants helps ensure no qualifying spend is left without relief. Head to our website and book a meeting now.

Conclusion

The annual investment allowance remains one of the most valuable tax reliefs a limited company can claim, delivering an immediate 100% deduction on up to £1 million of qualifying plant and machinery per year. Used alongside full expensing for new assets, a well-planned approach can achieve full relief on substantial capital investment in a single accounting period, as the £950,000 example shows. The key is to allocate AIA headroom to second-hand assets first, reserve full expensing for new main rate assets you intend to keep, and check the connected-party rules. Review your planned capital expenditure for 2026/27 now, and take advice before you commit to significant purchases.

About the Author

This guide was written by Leon, founder of Blue Tick Accountants, a Guildford-based UK tax advisory and accountancy practice that helps limited company owners across the UK plan tax-efficient capital investment. 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.