Annual Investment Allowance

The Annual Investment Allowance (AIA) lets you claim 100% tax relief immediately when you buy qualifying plant and machinery for your business. This guide explains how much you can claim and what to do when the AIA limit changes partway through your accounting period.

What is the Annual Investment Allowance?

The Annual Investment Allowance gives you full tax relief in the year you buy qualifying business equipment. Instead of claiming the cost gradually over several years through normal capital allowances (tax relief on business assets), AIA lets you deduct the entire cost from your profits straight away, reducing your tax bill.

The allowance applies to most plant and machinery purchases, including equipment, business vehicles (excluding cars), and tools. You claim AIA as part of your capital allowances when you complete your tax return.

Current AIA limit

The AIA has changed several times over the years. The limit has varied from £25,000 to £500,000 depending on when you purchased the equipment. Understanding which limit applies to your accounting period is essential for calculating your allowance correctly.

How limit changes affect your accounting period

When the maximum AIA amount changes during your accounting period, you cannot simply use one limit or the other. Instead, you must follow specific rules to calculate your entitlement.

Your accounting period is the period you draw up your accounts for. This might be 12 months, or it could be longer or shorter depending on your circumstances.

Calculating AIA when limits change

If the AIA limit changes during your accounting period, follow these four steps:

Step 1: Divide your accounting period into parts

Each part starts on either:

• The first day of your accounting period, or
• The day the AIA limit changes

Each part ends on either:

• The day before the AIA limit changes, or
• The end of your accounting period

Step 2: Calculate the maximum AIA for each part

Work out how much of the annual limit applies to each part based on its length.

If your accounting period consists of whole calendar months, you can use either days or months in your calculation. If it does not consist of whole calendar months, you must use days.

Step 3: Add the amounts together

This gives you the total maximum AIA for your entire accounting period.

Step 4: Check for restrictions

Depending on when you actually spent the money, you may face additional restrictions that reduce your maximum claim.

Worked examples

Change from £100,000 to £25,000

Suppose your company's accounting period runs from 1 January 2012 to 31 December 2012, and the AIA limit dropped from £100,000 to £25,000 on 1 April 2012.

Divide the period into:

• 1 January 2012 to 31 March 2012 (3 months at £100,000)
• 1 April 2012 to 31 December 2012 (9 months at £25,000)

Calculate each part:

• First part: 3/12 × £100,000 = £25,000
• Second part: 9/12 × £25,000 = £18,750

Total maximum AIA: £25,000 + £18,750 = £43,750

Important restriction: if you only purchased equipment after 1 April 2012, your maximum AIA cannot exceed £18,750.

Change from £25,000 to £250,000

Your accounting period runs from 1 July 2012 to 30 June 2013, and the AIA limit increased from £25,000 to £250,000 on 1 January 2013.

Divide the period into:

• 1 July 2012 to 31 December 2012 (6 months at £25,000)
• 1 January 2013 to 30 June 2013 (6 months at £250,000)

Calculate each part:

• First part: 6/12 × £25,000 = £12,500
• Second part: 6/12 × £250,000 = £125,000

Total maximum AIA: £12,500 + £125,000 = £137,500

Important restriction: if you only incurred expenditure from 1 July to 31 December 2012, the maximum AIA you can claim is restricted to £25,000 (the maximum before the increase).

Two changes in one period

Your company's accounting period runs from 1 April 2012 to 31 March 2013. During this period, the AIA limit changed twice for income tax purposes:

• It dropped from £100,000 to £25,000 on 6 April 2012
• It increased from £25,000 to £250,000 on 1 January 2013

Divide the period into three parts:

• 1 April 2012 to 5 April 2012 (5 days at £100,000)
• 6 April 2012 to 31 December 2012 (270 days at £25,000)
• 1 January 2013 to 31 March 2013 (90 days at £250,000)

Calculate each part:

• First part: 5/365 × £100,000 = £1,370
• Second part: 270/365 × £25,000 = £18,494
• Third part: 90/365 × £250,000 = £61,644

Total maximum AIA: £1,370 + £18,494 + £61,644 = £81,508

The restrictions are more complex when multiple changes occur. For expenditure incurred before 6 April 2012, you must calculate a separate maximum based on what the AIA would have been without the subsequent increase, which works out to £26,028 in this example.

Why these calculations matter

Getting your AIA calculation right ensures you claim the maximum tax relief available while staying within the rules. Claiming too much could result in HMRC adjusting your return and charging interest. Claiming too little means you pay more tax than necessary.

If your accounting period straddles an AIA limit change, keep clear records of when you incurred each item of expenditure. The date you commit to the purchase (not necessarily when you pay) determines which rules apply.

Sources

• Annual investment allowance: limit changes during accounting periods

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.