What is the annual investment allowance?
Definition of the annual investment allowance
The annual investment allowance is a way to claim tax relief on many assets that your business will buy. It’s a kind of capital allowance.
If your business buys a piece of equipment that qualifies for the annual investment allowance, you can deduct 100% of the cost of that asset from your business’s profit before you work out how much tax is due on that profit. You can learn more about what qualifies from HMRC.
The government sets a limit for how much annual investment allowance a business can claim in a year, which means that if you buy assets costing more than the limit, you won’t be able to claim annual investment allowance on all your assets. The limit was previously £200,000 but in January 2019 it was temporarily increased to £1,000,000. This new limit will be in effect until 1st January 2022.
If your business is registered for VAT, you claim the annual investment allowance on the total cost of the asset less any VAT you can reclaim on that asset. If your business is not registered for VAT, you claim the annual investment allowance on the total cost of the asset.
Example of the annual investment allowance:
Lucy is a sole trader and is not registered for VAT. She buys a new computer for her business costing £1,200. Her business’s profits for that year came to £20,000. She can claim annual investment allowance on the cost of the computer, so she will pay tax and class 4 NI on £18,800 (£20,000-£1,200 = £18,800).
Disclaimer: The content included in this glossary is based on our understanding of tax law at the time of publication. It may be subject to change and may not be applicable to your circumstances, so should not be relied upon. You are responsible for complying with tax law and should seek independent advice if you require further information about the content included in this glossary. If you don't have an accountant, take a look at our directory to find a FreeAgent Practice Partner based in your local area.
Frequently Asked Questions
Are all assets eligible for the annual investment allowance?
No, they’re not. The most common examples of assets that are not eligible for the annual investment allowance are cars and assets that you’ve used for something else before bringing them into your business, for example a family computer. These assets qualify for capital allowances spread out over several years, rather than the full cost at once, which is what the annual investment allowance gives.
