The annual investment allowance is also referred to as AIA and it is a tax break created by HMRC, permitting businesses to deduct the full value of certain qualifying assets against their profits before tax in the year of purchase. It is one of the tax allowances for the self-employed that helps to reduce tax bills by accelerating tax savings.
In this guide, I’ll explain how annual investment allowance works, what types of purchases qualify and how to claim it through self assessment.
How Does the Annual Investment Allowance Work?
The annual investment allowance (as known as the AIA) permits businesses to deduct 100% of the first £200,000 of their qualifying spend on plant & machinery against their taxes (both Limited and self-employed) in the year it is purchased, instead of using capital allowances which permits a write off of typically 18% each year.
Plant and machinery are typically fixed assets you use in your business such as:
How to Claim AIA
You’ll claim the annual investment allowance when you fill in your tax return. If you are self-employed that will be your self-assessment tax return in the self-employment section in the tax allowances sections (box 49).
If you have a Limited Company, you’ll need to claim it on your corporation tax return.
Annual Investment Allowance Restrictions
You cannot claim the AIA on cars, you’ll need to claim capital allowances instead, meaning you’ll receive tax relief on your car purchase over a set number of years depending on the emissions of the vehicle you’re claiming for.
If you are self-employed you also cannot claim this, as well as any other business expenses, if you want to claim for the HMRC trading income allowance.
If you choose to claim it you can use it to create a tax loss which you can carry forward against any future profits you make. So if you are just starting out and have spent money on equipment then you could consider filling in a tax return so you can get tax relief in later years.
Pro-Rating the Allowance
If you have been in business for an accounting period of less than one year, then you’ll need to pro-rate the £200,000 allowance.
For example, if you have only been in business for 6 months of the tax return you are completing, then you are only entitled to £100,000 (£200,000 x 6/12).
You’ll also need to pro-rate AIA if you buy fixed assets that you use for personally as well as in your business because you can only claim it on the business portion.
For example, say you buy a laptop for £1,500 and use it for 50% of the time in your business. You’ll be able to claim AIA on 50% of the laptop costs which is £750.
If you have two businesses that are run by you, have similar activities or operate from the same premises, then you’ll only receive one amount of AIA, so you’ll need to pro-rate it between your businesses.
Capital Allowances v. Annual Investment Allowance
The annual investment allowance is a type of capital allowance, but it only applies to equipment not cars. You could still use capital allowances on equipment you buy but this would restrict the amount you can claim against your taxes to 18% of cost each year. The AIA is more tax advantageous because it lets you claim 100% of what you’ve bought in the year you buy it.