Capital Allowances on Plant & Machinery: AIA vs First Year Allowances

Why Capital Allowances Matter for Your Limited Company

When your limited company buys plant and machinery, you generally cannot deduct the full cost as a standard business expense. Instead, you claim capital allowances, which spread or accelerate the tax relief on qualifying assets. Getting your strategy right can significantly reduce your Corporation Tax liability, so it pays to understand the two main tools available: the Annual Investment Allowance (AIA) and First Year Allowances (FYA).

The Annual Investment Allowance: Your First Port of Call

The AIA allows your company to deduct 100% of qualifying plant and machinery costs in the year of purchase, up to a current limit of £1,000,000 per year. This limit has been made permanent following the Spring Budget 2023 and remains in place for accounting periods from 1 January 2026 onwards.

• Qualifying assets: Most plant and machinery, including computers, tools, vehicles (excluding cars), and commercial equipment.
• Exclusions: Cars do not qualify for AIA. Neither do assets acquired from a connected person or assets used partly for non-business purposes where the private use element must be restricted.
• Timing: The asset must be purchased and in use during your accounting period to claim.

For the vast majority of limited companies, the AIA will cover all plant and machinery spend comfortably within the £1,000,000 cap. However, if your company is part of a group, the AIA is shared across all group members, so careful planning is essential.

First Year Allowances: 100% Relief on Specific Assets

First Year Allowances also provide 100% relief in the year of purchase, but they apply to specific categories of asset defined by HMRC rather than a monetary cap. Crucially, FYAs are available in addition to or instead of the AIA, meaning they do not eat into your AIA limit.

The most significant FYA currently available is the Full Expensing relief introduced in April 2023 and made permanent from April 2024. This allows incorporated businesses to claim 100% on main rate pool assets (such as most plant, machinery, and equipment) and 50% on special rate pool assets (such as integral features like electrical systems, solar panels, and long-life assets).

• Full Expensing (main rate): 100% deduction on new, unused plant and machinery that would otherwise go into the main pool.
• Full Expensing (special rate): 50% first year deduction on new special rate assets, with the remainder entering the special rate pool at 6% writing down allowance.
• Other FYAs: Zero-emission cars and new zero-emission goods vehicles qualify for a separate 100% FYA.

Important: Full Expensing only applies to new and unused assets. Second-hand machinery must be claimed through the AIA or standard writing down allowances instead.

How to Choose Between AIA and Full Expensing

In most cases, the practical difference is minimal since both deliver 100% relief in year one. However, there are key distinctions worth noting:

• Second-hand assets: Use AIA. Full Expensing does not apply.
• New assets exceeding the AIA limit: Use Full Expensing for the excess on main rate assets.
• Special rate assets: Full Expensing at 50% beats the standard 6% writing down allowance, but AIA at 100% is better still — so prioritise AIA for special rate items if you have capacity.
• Cash flow: Both provide immediate relief, reducing your Corporation Tax payment nine months after your year end.

Practical Steps to Maximise Your Allowances

• Keep detailed records of purchase dates, costs, and asset descriptions to support your claims.
• Consider timing large purchases to fall within the most tax-efficient accounting period.
• Identify whether assets are main rate or special rate before allocating AIA — prioritise AIA for special rate assets to maximise relief.
• If your company is within a group, agree the AIA allocation across entities before filing.
• Always use HMRC's Capital Allowances Toolkit or speak to your accountant before submitting your Company Tax Return.

Getting your capital allowances strategy right is one of the most straightforward ways to reduce your Corporation Tax bill legally and efficiently. Review every significant asset purchase with these rules in mind.