An Annual Investment Allowance (AIA) is a UK tax relief allowing businesses to deduct costs of purchasing equipment and assets from their profits before tax.
By allowing UK businesses to deduct a proportion of their capital expenditures and reducing their tax bills, AIA incentivises and encourages them to invest and expand.
If you’re wondering what an Annual Investment Allowance is, what qualifies and how it differs from the Writing Down Allowance, keep reading.
What is Annual Investment Allowance?
The Annual Investment Allowance (AIA) allows businesses to deduct the full cost of plant and machinery investments up to £1,000,000, not including cars, against taxable profits in the year they’re bought.
So whether you’re a sole trader, partnership or limited company, you can get 100% tax relief on qualifying expenditures every year. You do not have to be an incorporated business to take part in this allowance.
The good news is that you can keep investing each year as the AIA renews annually.
What expenditures qualify for AIA?
You can claim tax relief on investments from manufacturing equipment and vehicles (not cars) to computers and office furniture. The qualifying assets are for business use only.
What expenditures don’t qualify for AIA?
You can’t claim tax relief on business cars, items you owned for another reason before you started using them in your business or items given to you or your business.
What Can Businesses Claim with AIA?
UK SMEs can claim 100% tax relief on the first million pounds of investments every year. These tax deductions apply to all qualifying capital expenditures incurred in the 12 months from the end of the accounting period.
What does this mean?
It means if your year-end finishes 31 Dec 2023, any qualifying purchases between 1 January 2023 and 31st December 2023 will qualify for Annual Investment Allowance in this annual accounting period.
Assets bought with AIA still need to be added to capital allowances pools and deducted at the relevant Writing Down Allowance rate in future.
What is the Writing Down Allowance?
A Writing Down Allowance allows businesses to deduct a percentage of the asset in capital allowance pools yearly. The Writing Down Allowance rate depends on the type of asset pool:
- Main pool assets deduct 18% a year (includes computer hardware, office equipment, plant and machinery)
- Special rate pool assets deduct 6% a year (includes thermal insulation, lifts, integral features of a building, e.g. electrical, assets with a useful economic life of 25 years or more)
Unlike with the Annual Investment Allowance, you can’t deduct the full cost of the asset immediately. Instead, a percentage of the asset value is deducted every year.
A Writing Down Allowance example:
You spend £2 million, £1 million of which is covered by the AIA. The remaining £1 million goes into the pool (either the main pool or special rate pool, depending on the expenditure type).
18% is deducted from the remaining pool balance in the first year. The next year, 18% more is deducted, each year the same until the value reaches £0.
Make substantial tax savings and improve cash flow
Using both the UK Annual Investment Allowance and the Writing Down Allowance strategically can help you make substantial tax savings, and reducing your tax frees up cash that would have otherwise been paid to HMRC, giving you better cash flow.
The rules for the AIA and WDA can be confusing and complex depending on when you purchased the plant or machinery, the type of asset you purchased, or the date of your accounting period.
If you’re unsure whether your assets are eligible or you have further questions about either tax scheme, always seek professional advice from your accountant or tax specialist.
How to get capital to invest
You might need an injection of working capital to take advantage of these tax relief schemes and purchase plant or machinery.
There’s good news! We work with a panel of UK lenders offering alternative business funding that’s affordable and flexible to suit your business needs. From asset and green financing to equipment finance — our product range is varied.
If you’re wondering what finance you qualify for, use our free loan comparison tool to view eligible products in just seconds. Getting a quote does not affect your credit score, and you’re under no obligation to accept any offer presented to you - get your quote today.