Annual Investment Allowance and Full Expensing: Which Applies?

Capital allowances at a glance

• AIA: £1m cap, any business, new or second hand.
• Full expensing: no cap, companies only, new and unused only.
• 50% FYA: companies, new special rate assets such as integral features.
• Cars are excluded from all three. They go into a pool instead.
• Companies under common control share one AIA between them.

Table Of Contents

• Why There Are Two Allowances
• Which One Applies to You
• What Counts as Plant and Machinery
• Main Rate vs Special Rate
• The Car Exclusion
• Sharing the AIA Between Companies
• The Disposal Trap in Full Expensing
• When Not to Claim Everything
• Timing a Purchase
• Get Help With a Large Purchase

Why There Are Two Allowances

The Annual Investment Allowance has existed since 2008 and is open to every kind of business. Full expensing arrived in April 2023 for companies only, to replace the super-deduction and soften the rise in corporation tax to 25%. They overlap heavily, which is why the choice confuses people.

The logic behind the overlap is straightforward once you see it. AIA was never intended to cover large-scale capital investment; £1 million a year is generous for most businesses but trivial for a manufacturer re-equipping a factory. Full expensing removed the cap, but only for companies, and only for new assets, because the policy aim was to encourage fresh investment rather than the shuffling of used equipment between related businesses.

For the great majority of owner-managed businesses, spend stays well under £1 million and AIA does everything. The distinction only starts to matter at the margins.

Which One Applies to You

	AIA	Full expensing	50% FYA
Limit	£1m per period	Unlimited	Unlimited
Who can claim	Any business	Companies only	Companies only
New or second hand	Both	New and unused only	New and unused only
Asset type	Main and special rate	Main rate only	Special rate only
Relief in year one	100%	100%	50%

Working through it:

• Sole trader or partnership? AIA only. Full expensing isn’t available to you at all, which is one of the genuine tax advantages of incorporating for an asset-heavy business.
• Company spending under £1m? AIA covers it, including second hand assets, and avoids the disposal complication below.
• Company spending over £1m? Use AIA on the first £1m (ideally on second hand items and special rate assets, which full expensing either can’t cover or covers at only 50%), then full expensing above it.
• Buying new integral features? The 50% FYA applies, or use AIA if you have headroom, which gives 100% and is therefore better.

That third point is the only real optimisation here, and it’s worth stating plainly: allocate AIA to the assets full expensing handles worst. Second hand equipment and special rate items first, new main rate plant last, because full expensing picks up new main rate plant at 100% anyway.

What Counts as Plant and Machinery

Broadly, the equipment a business uses to trade rather than the premises it trades from:

• Machinery, tools and manufacturing equipment
• Computers, servers, IT equipment and most software
• Vans, lorries and commercial vehicles (not cars)
• Office furniture, fittings and equipment
• Integral features of a building: electrical systems, heating, air conditioning, lifts, cold water systems
• Some fixtures within a property, and thermal insulation

What doesn’t qualify at all:

• Cars, dealt with below
• Land and buildings themselves, which are covered separately by the structures and buildings allowance at a much lower rate
• Items you owned for another purpose before bringing them into the business
• Gifts, including assets given to the business
• Items you lease rather than buy, where the lessor claims instead

That third exclusion catches sole traders regularly. A laptop bought personally two years ago and now used for the business doesn’t attract AIA. It can go in at market value for writing down allowances, but the 100% deduction isn’t available.

Main Rate vs Special Rate

Where an asset can’t be relieved in full immediately, it goes into a pool and attracts writing down allowances on a reducing balance basis:

Pool	Rate	Typical contents
Main rate	18%	Most plant, machinery, IT, commercial vehicles, furniture
Special rate	6%	Integral features, long life assets, thermal insulation, most cars

The distinction matters for two reasons. Full expensing only covers main rate assets, with special rate limited to the 50% FYA. And relief in the special rate pool is genuinely slow: at 6% reducing balance it takes about 11 years to relieve half the cost, which is why using AIA on special rate items is usually the better allocation.

Integral features are the ones people miss. Buying or refurbishing commercial premises often involves substantial spend on electrical and heating systems that qualifies as special rate plant, and a capital allowances review on a property purchase can identify relief nobody claimed at the time.

The Car Exclusion

Cars are excluded from both AIA and full expensing. There's no way to get 100% relief on an ordinary car through either route. Instead cars go into a pool and attract writing down allowances at a rate set by CO2 emissions, with the cleanest attracting 18% and everything else 6%.

The exception is new and unused zero emission cars, which have their own 100% first year allowance. That’s a deliberate policy lever and it’s the reason electric vehicles have become a standard part of director remuneration planning, alongside the very low benefit in kind rate.

Vans, lorries and other commercial vehicles are not cars for this purpose and do qualify for AIA and full expensing in the normal way. The boundary between a car and a commercial vehicle is occasionally contested, particularly for double cab pick-ups and car-derived vans, and it’s worth checking before assuming.

Our guide to leasing an electric car through a limited company covers the wider comparison.

Sharing the AIA Between Companies

Companies under common control get one AIA between them, not one each, and can choose how to share it. The same restriction applies to sole traders and partnerships controlled by the same person where the businesses share premises or carry on similar activities.

This mirrors the associated companies rules for corporation tax, and it catches the same people: a director with three companies who assumes each has its own £1m allowance.

The allocation is yours to make, which is a genuine planning point. Give the AIA to the company that benefits most, normally the one paying the highest effective rate. A company inside the marginal relief band is relieving at 26.5%, higher than a company paying the 25% main rate, so directing allowances there is worth slightly more.

The Disposal Trap in Full Expensing

This is the part that isn't obvious at the time of claim. When you sell an asset on which full expensing was claimed, a balancing charge arises on the full disposal proceeds, taxed immediately. That's harsher than the normal treatment, where proceeds simply reduce a pool balance and the effect is spread across future years.

An example. A company buys new machinery for £300,000 and claims full expensing, relieving the whole amount. Three years later it sells the machinery for £120,000.

• With full expensing: £120,000 is an immediate balancing charge, taxable in that period.
• Had AIA been claimed: the same £120,000 would reduce the main rate pool, relieving at 18% a year, with no immediate charge.

Same relief on the way in, very different treatment on the way out. For a company that regularly cycles equipment, this matters and can make AIA the better claim even within the £1m limit.

Practical consequence: note in your fixed asset register which assets carried full expensing. Three years later, when the asset is sold, nobody remembers, and it’s an easy error to make in a corporation tax computation.

When Not to Claim Everything

Claiming capital allowances is optional, and you can claim part of the cost and leave the rest in a pool. Occasions where restricting the claim is better:

• Sole traders and partners whose profits would fall below the personal allowance. A full claim wastes £12,570 of tax-free income that can’t be carried forward, while the unclaimed allowance sits in a pool and relieves later at 20% or 40%.
• Companies just below the £50,000 small profits limit, where a large claim relieves at 19% but the same allowance carried forward might relieve at 26.5% in a marginal-band year.
• Where losses would be created that can’t be used efficiently.

This is one of the few places where the obvious answer (claim everything now) is regularly wrong, and it’s worth modelling rather than defaulting.

Timing a Purchase

Capital allowances are given for the period in which the expenditure is incurred, which is generally when the obligation to pay becomes unconditional, not when the invoice is paid.

Two timing points worth knowing:

• Buying just before a year end brings relief forward a full year. Buying a week after moves it back twelve months.
• The £1m AIA limit is per accounting period, and is proportionately reduced for periods shorter than 12 months. Spend spread across two periods gets two allowances.

None of which is a reason to buy equipment you don’t need. The relief is worth 19% to 26.5% of the cost to a company; the other 73.5% to 81% is still money spent.

Get Help With a Large Purchase

Most capital allowance questions are simple and AIA answers them. The ones worth advice are large purchases near or above the £1m limit, property acquisitions where integral features can be identified, groups sharing a single allowance, and situations where claiming less this year is worth more overall.

ARB Accountants advises owner-managed companies on capital expenditure: which allowance applies, how to allocate across assets and companies, the disposal consequences, and whether the timing of the spend should move.

Read next

• Associated companies and marginal relief: why the rate you relieve at varies
• Why would you not claim capital allowances?: when restricting a claim pays
• Leasing an electric car through a limited company: the exception to the car exclusion
• Buying a van as a sole trader: commercial vehicles and AIA