1. Introduction – What is AIA?
The Annual Investment Allowance (AIA) allows a business to claim 100% tax relief on qualifying plant and machinery in the year of purchase, up to the annual limit (currently £1 million per 12-month period).
Instead of spreading relief over several years through writing down allowances, AIA gives full relief immediately — reducing taxable profits in the year of expenditure.
2. What Can Qualify for AIA?
AIA applies to plant and machinery used in the business. For capital allowance purposes, these items usually fall into two categories:
A. General Pool Items (Main Rate – 18%)
These are standard business assets. Examples include:
- Office furniture (desks, chairs, shelving)
- Computers and IT equipment
- Machinery and tools
- Vans
- Commercial kitchen equipment
- Shop fittings
If AIA is claimed, you receive 100% relief immediately rather than 18% per year.
If AIA is not claimed (or the limit has been used up), the expenditure is added to the main pool and relief is given at 18% writing down allowance (WDA) per year on a reducing balance basis.
AIA does not apply to:
- Cars (except electric cars in limited cases under different FYA rules)
- Land and buildings
- Items previously owned by the business before incorporation (connected party restrictions)
- Assets bought for leasing (subject to restrictions)
B. Special Rate Pool Items (6%)
These are typically integral features of buildings or long-life assets. Examples include:
- Electrical systems
- Cold water systems
- Heating systems
- Air-conditioning systems
- Lifts
Without AIA, these items normally qualify for 6% writing down allowance per year.
If AIA is claimed, full 100% relief is available in year one instead of 6% per annum.
3. What Happens If AIA Has Been Fully Used?
If a business spends more than its available AIA limit in an accounting period:
- The first part of expenditure (up to the limit) receives 100% AIA.
- The excess expenditure is allocated to the relevant capital allowance pool:
- General items → Main pool (18% WDA)
- Special rate items → Special rate pool (6% WDA)
4. AIA and Group Companies
Where companies are in a 75% group, the £1 million AIA limit is shared across the group, not per company.
The group must decide how to allocate the allowance between companies.
If one company uses the entire AIA limit, other group companies:
- Cannot claim AIA.
- Must allocate their qualifying expenditure into:
- Main pool (18%), or
- Special rate pool (6%).
Careful planning is therefore important within groups to maximise overall tax efficiency.
5. What Happens if You Sell an Item Claimed Under AIA?
If 100% AIA was claimed and the asset is later sold:
- The sale proceeds are brought into the capital allowance computation.
- Proceeds amount reduces the main/special pool balance.
Key Takeaways
- AIA gives 100% immediate tax relief up to the annual limit.
- It applies to both general pool (18%) and special rate pool (6%) items.
- Once AIA is used up, further expenditure goes into the relevant pool.
- Group companies must share the £1 million limit.
- Selling an asset previously claimed under AIA can trigger a balancing charge.
AIA is a powerful relief, but allocation decisions — especially in groups or where expenditure exceeds the limit — can significantly affect the timing of tax relief. Professional advice may be appropriate where expenditure is substantial.
