Capital allowances and the Annual Investment Allowance explained

When a business buys something durable to work with — a machine, computers, tools, a van — it is usually not a one-off expense but a capital investment. Capital allowances let you cut tax on such purchases. The most prominent type for small businesses is the Annual Investment Allowance (AIA).

What does the Annual Investment Allowance give you?

The AIA lets you deduct the full value of qualifying plant and machinery from your profits before tax in the same year you buy it — up to an annual limit. That limit is £1 million and has applied since 1 January 2019, for sole traders and partnerships as well as companies. For most small businesses that is more than enough to write off the whole cost of purchases at once.

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What counts as plant and machinery?

The AIA covers most equipment, machines, tools and kit you use in the business. Cars, however, are not covered by the AIA — they use a different mechanism (writing-down allowances). You also cannot claim AIA on things you owned for another purpose before using them in the business, or on items given to you as a gift.

What if purchases exceed the limit, or it is a car?

If spending is above the annual AIA limit or involves assets it does not cover (such as cars), the remaining value is written off through writing-down allowances — gradually, in parts, at set rates over several years rather than all at once. Companies also have additional accelerated mechanisms for some new assets.

How do you use this in practice?

You claim capital allowances in your tax return: the self-employed on the Self Assessment return, companies on the Corporation Tax return. Keep invoices and records of purchases, and remember the split between personal and business use: if you also use an item personally, only the business share is claimed. For large investments it is worth planning purchases around the annual limit.

How is this different from ordinary expenses?

Everyday running costs — rent, materials, phone bills — are revenue expenses, and you simply deduct them from the same period's profit. Capital purchases — things that serve the business for a long time — go through the separate capital allowances mechanism. The self-employed also have a simplification: instead of capital allowances, some assets can be accounted for on a cash basis, where the cost reduces profit straight away (except cars, which have their own rules). Which method is better and suits you depends on your business type and the scale of spending, so it is worth clarifying the 'revenue or capital' line in advance.