You can use the Annual Investment Allowance (AIA) to claim a very generous 100% first year tax relief for qualifying expenditure on plant and machinery. The allowance is available for most assets purchased by a business but does not apply to cars.
The AIA was set at £200,000 per calendar year for all qualifying expenditure on or after 1 January 2016. However, there is a new temporary increase in the allowance that came into effect from 1 January 2019 to £1 million. This temporary increase will last until the end of 2020.
The AIA can be claimed by an individual, partnership or company carrying on a trade, profession or vocation, a UK non-residential property business or a furnished holiday let. Partnerships or trusts with individuals and companies in the business structure do not qualify for the AIA.
The timing of any large equipment purchases should also be carefully considered to ensure that, where possible, the purchase of your qualifying equipment is made at the optimal time.
A note of caution
If you are self-employed, you should be careful when making a claim for the AIA. This is because you do not want to ‘overclaim’ and by doing so reduce your taxable income below your personal allowance. This would result in you effectively wasting all or part of your annual personal allowance. We would recommend that you use as much AIA as is available to reduce profits to no lower than the personal allowance relief threshold.
