What is the Annual Investment Allowance? (Part 2)

Posted on November 26th, by Helen in business advice, Small business tax. Comments Off

Planning on buying plant & Equipment?

Planning on buying plant & Equipment?

The Annual Investment Allowance enables a business to reduce its tax bill by claiming for the cost of capital equipment in the year it bought the equipment. Up until December 2015 the maximum Annual Investment Allowance is £500,000. But from January 2016 this amount drops to £200,000.

This might seem very straight forward but in fact it is slightly more complicated than that. For a business with an accounting year that is partly in 2015 and partly in 2016 the amount that can be claimed is a proportion of each limit. There are transitional rules that affect how much can be claimed and it all depends on the timing of your purchase. So if you buy a number of pieces of equipment for fairly low costs this may not be a problem. Alternatively you may buy one large piece of machinery and find that you cannot claim all of the cost even though it falls within the maximum limit for the year. This is because the Annual Investment Allowance is spread across the year.

Here is an example of a business with a 31st March year end:

For April – December 2015 the company can claim 9/12 x £500,000 = £375,000 for expenditure before December 2015


For January – March 2016 the company can claim 3/12 x £200,000 = £50,000 for expenditure between January and March 2016

Suppose the company plans to make a purchase of capital equipment of £75,000 but due to delays makes the actual purchase in January?

Then only £50,000 will be eligible for the annual investment allowance. The remaining £25,000 will receive tax allowances at the standard rate of 18% p.a. until the asset is disposed of, or the asset pool has a value of £1,000 or less. So it will take a lot longer to reduce your tax bill.

If your business is planning to make a large purchase of equipment it is worth thinking about the timing. Ask your accountant for help if you are not sure if you will be affected.


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