Full Expensing and the Annual Investment Allowance: Getting Every Pound of Capital Allowances in 2026

Buying equipment is one of the few remaining ways a UK company can convert spending into an immediate, sizeable corporation tax deduction. Two reliefs do most of the heavy lifting: full expensing and the Annual Investment Allowance. Most owner-managed businesses use one when the other would have been worth more.

Full expensing, in plain terms

Companies paying corporation tax can deduct 100 percent of the cost of qualifying new and unused plant and machinery from taxable profits in the year of purchase. At the 25 percent main rate, £40,000 of qualifying spend reduces the tax bill by £10,000 in that year.

There is a parallel 50 percent first-year allowance for new special rate assets — typically integral features such as electrical systems, heating, air conditioning and lifts. The remaining 50 percent goes into the special rate pool and attracts writing down allowances at 6 percent a year.

Full expensing applies only to companies, only to new and unused assets, and it excludes cars, assets bought to lease out, and most second-hand purchases.

The Annual Investment Allowance covers the gaps

The AIA gives 100 percent relief on up to £1 million of qualifying plant and machinery per year, and it is more generous in scope than full expensing: second-hand equipment qualifies, and unincorporated businesses (sole traders and partnerships) can claim it too.

The practical rule of thumb:

• New equipment bought by a company — full expensing, and preserve AIA headroom for anything else.
• Second-hand equipment, or any purchase by a sole trader or partnership — AIA.
• Integral features and other special rate assets — AIA first (100 percent) rather than the 50 percent first-year allowance, if you have AIA capacity left.

That last point catches people out. The 50 percent allowance is not automatically better because it is newer.

What actually qualifies

Machinery, tools, commercial vehicles and vans, computers and servers, office furniture, most fixtures and fittings, and some software all typically qualify. Cars never qualify for AIA or full expensing; they get writing down allowances instead, with the rate depending on CO2 emissions. Buildings and land do not qualify, though the Structures and Buildings Allowance gives 3 percent a year on qualifying construction costs.

Timing matters more than people think

Relief follows the date of the contractual obligation to pay, not the date the cash leaves your account. Equipment ordered and committed to before your year end can usually be claimed in that year even if the invoice is settled afterwards. Equally, bringing a purchase forward by two weeks to land in a profitable year can pull the tax saving twelve months earlier.

There is a limit to how far this helps: capital allowances reduce taxable profit, and if they push profits to nil you are just carrying losses forward. Buying equipment you do not need to save tax is still a net loss of cash.

The balancing charge trap

Full expensing comes with a sting. If you later sell an asset you claimed full expensing on, you must bring in an immediate balancing charge equal to 100 percent of the disposal proceeds — added straight to taxable profits, not netted against a pool. Sell a £30,000 machine three years later for £12,000 and £12,000 is added to that year's profit.

For 50 percent first-year allowance assets, the balancing charge is 50 percent of proceeds. Plan disposals with the same care you planned the purchase, especially if you are refreshing a fleet or upgrading equipment on a cycle.

Practical checklist before your year end

1. List everything capital you have bought or committed to this year, including items expensed to profit and loss in error.
2. Split the list into new versus second-hand, and plant versus integral features.
3. Allocate full expensing first for new company assets, then AIA against the rest, highest-relief items first.
4. Check whether any planned Q1 purchases can be committed before year end.
5. Note the assets that will carry a balancing charge on disposal, so a future sale does not surprise you.
6. Keep invoices and finance agreements — hire purchase usually qualifies, operating leases do not.

The bottom line

Full expensing and AIA are not alternatives to choose between once; they work together, and the order you apply them decides how much tax you actually save. Review the capital list before the year closes, not when the accounts are being prepared six months later, when every timing option has already expired.

General guidance only. Capital allowance treatment depends on the specific asset and contract terms.