Annual Investment Allowance — Writing Off Tools, Vans and Kit in Year One (2026)

What Capital Allowances Actually Are

When you spend money running your business — fuel, materials, phone bills, subcontractor labour — you deduct it from your income as a normal running cost, and you pay tax only on what's left. But HMRC treats the purchase of substantial, long-lasting equipment differently. A van, a tile saw or a generator is a capital asset: it's expected to last more than a year and keeps earning you money over time. You generally can't just deduct it as an everyday expense.

Instead, you claim capital allowances. This is the mechanism HMRC uses to let you set the cost of business assets against your taxable profit. There are several types of capital allowance, but for the vast majority of trades the one that matters most is the Annual Investment Allowance.

The Annual Investment Allowance (AIA)

The Annual Investment Allowance lets a business deduct 100% of the cost of qualifying plant and machinery in the year of purchase, rather than spreading it over several years. In effect, you get the full tax relief straight away — the entire cost comes off your taxable profit in the accounting period you bought the item.

There is an annual limit on how much you can claim under the AIA. As of 2026 that limit is £1,000,000 per year. For an ordinary sole trader or small Ltd trade spending a few thousand pounds on tools and a van, you are nowhere near this ceiling — it's effectively unlimited for your purposes. It matters only for businesses making very large capital investments in a single year.

One thing to be aware of: the AIA limit has moved up and down over the years (it has been as low as £25,000 and was temporarily raised to £1m before being made permanent). It's currently £1m, but limits and thresholds change in Budgets, so always confirm the figure that applies to your accounting period.

What Qualifies for the AIA

The AIA covers most "plant and machinery" — a broad category that includes nearly all the working kit a trade business buys. Qualifying items typically include:

• Hand tools and power tools: drills, saws, grinders, nail guns, breakers and the like
• Machinery and equipment: generators, compressors, cement mixers, tile cutters, pressure washers
• Scaffolding, access towers and ladders you buy outright
• Office and IT equipment: laptops, phones, printers, software bought outright, job-management hardware
• Integral features in business premises you own — electrical systems, heating, air conditioning, water systems
• Vans: crucially, most vans count as plant and machinery and qualify for the AIA, so you can write off the full cost of a van in year one

That last point is the one trades most often get wrong. A van — whether new or second-hand — is treated as plant and machinery, not as a "car", so the full purchase price (the business-use proportion of it) can be claimed under the AIA in the year you buy it. For a sole trader who uses the van privately as well, you claim only the business-use percentage.

What Does NOT Qualify for the AIA

A few important things sit outside the Annual Investment Allowance:

• Cars. Cars are specifically excluded from the AIA. Instead, a car gets relief through writing-down allowances (or, for some low-emission new cars, a first-year allowance), with the rate based on the vehicle's CO2 emissions. A low-emission or electric car attracts faster relief; a higher-emission car attracts slower relief at the lower writing-down rate. This is the single biggest difference between buying a van and buying a car for your business.
• Buildings and land. The structure of a building and the land it sits on don't qualify, although integral features within it (wiring, heating, plumbing) may.
• Things you lease rather than buy. If you lease a van or hire equipment, you don't own it, so you claim the lease or hire payments as a normal running expense instead — the AIA doesn't apply.
• Items used partly for non-business purposes are restricted to the business-use proportion.

If You Use the Cash Basis

Many sole traders use the cash basis for their accounts, where you record income and expenses when money actually moves rather than when invoices are raised. Under the cash basis, the capital allowance rules work differently: you generally just deduct the cost of most equipment — tools, machinery, vans — as a straightforward expense in the year you pay for it, rather than formally claiming the AIA.

The practical outcome is usually the same — you get full relief in year one — but the route is simpler. The key exception is cars, which are still dealt with through capital allowances and writing-down allowances even under the cash basis. So a cash-basis sole trader expenses the van directly but must apply the car rules to a car.

How the AIA Cuts Your Tax Bill

The AIA reduces your taxable profit, and your tax is calculated on that lower profit. For a sole trader that means less income tax and less Class 4 National Insurance; for a limited company it means less corporation tax. Here's a simplified worked example for a sole trader.

Say your trade makes £50,000 profit in the year before equipment purchases. During the year you buy a second-hand van for £12,000 and tools worth £3,000 — £15,000 of qualifying plant and machinery, all used wholly for business. You claim the full £15,000 under the AIA.

• Profit before the claim: £50,000
• AIA claim: £15,000
• Taxable profit after the claim: £35,000

For a basic-rate taxpayer, knocking £15,000 off taxable profit saves roughly 20% income tax plus Class 4 NIC on that slice — a meaningful reduction in the bill, all claimed in the year you spent the money rather than dribbled out over years. The exact saving depends on your other income, your tax band and the rates in force, so treat the percentages as illustrative.

Timing Purchases Around Your Year End

Because the AIA gives relief in the accounting period of purchase, when you buy can matter. If you're approaching your year end and you know you'll need a new van or a big tool order soon, bringing the purchase forward by a few weeks pulls the tax relief into the current year rather than the next one — useful if this year's profits are high.

The flip side: don't spend money purely to save tax. You only save a fraction of the cost in tax; you still part with the whole amount. Buy kit when the business genuinely needs it, and let timing be a secondary consideration rather than the reason for the purchase. For a sole trader, the date the asset is brought into use and the date of purchase both matter, so keep clear records of both.

AIA vs the Writing-Down Allowance and Main Pool

What happens if your qualifying spend ever exceeds the AIA limit, or if an item doesn't qualify for the AIA (like a car)? That's where the writing-down allowance (WDA) comes in. Instead of 100% relief in year one, the value goes into a pool and you claim a percentage of the remaining balance each year.

Most assets go into the main pool, which attracts an 18% writing-down allowance a year on a reducing-balance basis. Some assets — including higher-emission cars and certain integral features — go into a special rate pool with a 6% annual writing-down allowance. So you keep claiming a slice of the cost year after year until it's written down. For ordinary trades, the AIA usually mops up everything and the pools only come into play for cars or unusually large spending.

Full Expensing for Limited Companies

If your trade is a limited company, there's a separate relief called Full Expensing. It lets companies deduct 100% of the cost of qualifying new plant and machinery in the year of purchase, with no upper limit, against corporation tax. There's also a 50% first-year allowance for qualifying special-rate assets.

Full Expensing is for companies only — sole traders and partnerships can't use it and rely on the AIA instead. It also applies only to new assets, whereas the AIA covers both new and second-hand kit. In practice, a small Ltd buying a second-hand van would use the AIA for it, and might use Full Expensing for brand-new equipment. The two reliefs overlap heavily for most small companies, so an accountant will pick whichever route gives the cleanest result.

Quick Reference: How Common Trade Assets Are Claimed (2026)

Thresholds, rates and the AIA limit change from time to time, and the right route depends on your business structure and your full set of figures. Use this as a starting point and have your accountant confirm the treatment of any significant purchase before you file.