What is the annual investment allowance?

The annual investment allowance (AIA) lets you deduct the full cost of most equipment and vans from your profits in the year you buy them, up to £1 million. In 2026-27 it matters if you use traditional accounting.

This page is for self-employed tradespeople and CIS subcontractors. The rules follow GOV.UK and HMRC's Capital Allowances Manual as checked on 16 October 2026.

How the allowance works

Capital allowances are tax relief on things you keep and use in your business, which GOV.UK calls "plant and machinery". The AIA is the simplest: instead of spreading the cost over several years, you deduct the whole price in one go.

The key rules:

• The limit is £1 million. It has been £1 million for sole traders since 1 January 2019.
• You get a new allowance each accounting period. If your period is 9 months, the limit is 9/12 of £1 million, which is £750,000.
• You claim in the period you bought the item. GOV.UK says the date you bought it is when you signed the contract, if payment is due in less than 4 months, or when payment is due, if that is more than 4 months later.
• Hire purchase counts. When you start using the item you can claim for all the payments under the contract, but not the interest.
• It is optional. You can claim all, part or none of it, and put the rest into writing down allowances. HMRC's manual says an unused allowance cannot be carried forward.

What qualifies and what does not

HMRC's manual says the AIA covers "virtually all" plant and machinery. Its examples include computers, office equipment, vans, lorries, trucks, cranes and diggers.

For comparison, the main rate of writing down allowance fell from 18% to 14% a year on 6 April 2026 for Income Tax. GOV.UK says an accounting period that spans that date uses a hybrid rate.

GOV.UK's guide to working out allowances says to include VAT in an item's value only if you are not VAT registered.

How the cash basis changes things

From 6 April 2024 the cash basis became the default way for sole traders to work out profit. Under the cash basis, GOV.UK says you can only claim capital allowances on business cars. A van, tools, machinery or a computer you keep for the business is claimed as an ordinary allowable expense instead.

So most tradespeople on the cash basis do not use the AIA at all. The full cost still comes off in one year, without a capital allowances calculation. The AIA matters if you have opted for traditional accounting, for example because a lender wants traditional accounts.

Private use

As a sole trader, you cannot claim the full value of something you also use outside the business. HMRC's manual says the AIA is reduced on a "just and reasonable" basis for private use. The item goes into its own single asset pool, and the full allowance, before the reduction, is still taken off that pool. That matters when you sell it, which our guide on selling your van covers.

Worked example

An electrician uses traditional accounting with a tax year running from 6 April 2026 to 5 April 2027. They are not VAT registered. In that year they buy:

The full £27,800 is well inside the £1 million limit, so the electrician deducts £25,000 from their profits for 2026-27. The van and the laptop each sit in a single asset pool at nil, because the full allowance is taken off even though the claim was cut for private use. Under the cash basis the same three items would be claimed as expenses for the same business shares, so the year-one deduction would also be £25,000. This is an example only. Your own figures will differ.

What this means for you

On the cash basis, the default, you claim your van and tools as ordinary expenses and can largely ignore the AIA. On traditional accounting, the AIA is how the full price of a van or kit comes off your profits in the year you buy it. Either way, cars follow different rules, private use cuts the claim, and selling the item later can bring tax back.

Steps to claim the annual investment allowance

1. Check your accounting method. Your last tax return says if you used traditional accounting.
2. List what you bought in the period: the item, the date of the contract or payment due date, and the price.
3. Take out any cars, leased items and things you owned before using them in the business.
4. Work out an honest private-use share for each item and cut the claim by it.
5. Enter the claim in the capital allowances section of your tax return, or in your Making Tax Digital (MTD) software.
6. Keep a note of each item and its pool at nil, so you can work out the tax if you sell it.

For more on vans, see claiming your van as a business expense. Use the free MTD check to see when Making Tax Digital starts for you, and the trades section for more guides.