Annual Investment Allowance lowering from £1m to £200,000

We wanted to share an update regarding Annual Investment Allowance (AIA), and the changes happening as of 1st January 2021. When you make capital expenditure such as plant and machinery, you get an allowance called Annual Investment Allowance (AIA) which gives you a tax deduction in the year of purchase at 100%. Currently the AIA is £1m meaning if you spent £500,000 on qualifying assets you would get £95,000 offset against any corporation tax due that year (at the current rate of Corporation Tax -19%).

As of the 1st January 2021 this allowance is dropping to £200,000 which means that if you spent £500,000 on qualifying assets between January and 31st March 2021, you would only get allowances of just under £25,000. It would take another 10 years of drip fed relief before the company to gradually receive tax relief of 90% of its outlay.      

If you delayed the same purchase until between April 21st and March 22nd in the accounting year, the corporation tax reduction for that year would be just over £48,000. In this scenario it would take another 8 years for the company to gradually receive tax relief on 90% of its outlay.

The above scenarios are in relation to a Limited company making the purchase, but AIA is also available to Sole Trade and Partnership businesses and if the owners are paying a higher rate of tax, the relief would be much greater.

Over time, the outlay of capital expenditure makes no difference to the amount of relief received, but the timing of the outlay can make a huge difference with the timing the relief is received and the positive effect it can have on cashflow.

So, if you are thinking about making capital expenditure but holding off pulling the trigger (given the current climate), we believe that the above changes in legislation should be a big factor in your decision making.

As always, if you would like to discuss any of the above please contact Fiona Ferrol, Head of Tax on 01224 573 904 or

Yours sincerely,

Ross Murray Director at Acumen