Changes to the Annual Investment Allowance

The temporary increase in the Annual Investment Allowance (AIA) limit to £1,000,000 has been extended to 31 December 2021.

What is the AIA?

The AIA is a 100% upfront allowance which enables a business to write off expenditure on qualifying plant and machinery up to a specified amount each year. It is intended to encourage greater levels of investment in the economy by providing an increased incentive for businesses to invest in plant and machinery.

Most assets that qualify as plant and machinery for capital allowances will qualify for AIA. Some common examples are computers, office furniture and equipment, vans and lorries, machines used for business purposes, certain fixtures such as air conditioning, and certain parts of a building referred to as ‘integral features’.

Assets that are excluded from AIA include buildings, cars and assets used solely for business entertainment. For sole traders and partnerships, there is a restriction on AIA entitlement for assets that are used partly for private purposes.

Although cars do not qualify for AIA, expenditure incurred before 1 April 2021 on electric cars or cars which have CO2 emissions not exceeding 50g/km will qualify for 100% first year allowances, provided that the cars are acquired new and unused.

The maximum amount

The AIA limit has changed a number of times since it was first introduced in The Finance Act 2008. The amount was temporarily increased to £1,000,000 from 1 January 2019 and was due to revert back to the permanent limit of £200,000 from 1 January 2021. In a statement made on 12 November 2020, the government announced that the increased limit will remain in place for another year and will revert back to £200,000 on 1 January 2022.

The change is intended to stimulate investment by supporting businesses with 100% up-front tax relief during the continuing uncertainty caused by COVID-19.

The AIA limit applies to a 12-month accounting period and transitional rules will apply where a business has a chargeable period that spans 1 January 2022.

Expenditure in excess of the available AIA will be dealt with under the standard rules for capital allowances and will qualify for writing down allowances in the general pool or special rate pool.

Contact us

If you would like to discuss how the extension of the increase in Annual Investment Allowance could affect your business please get in touch with our tax team.