The Annual Investment Allowance and full expensing (including the 50% first-year allowance) provide substantial tax relief in the period of expenditure.  For companies, each can be claimed in the same period, depending on the amount of expenditure and the plant or machinery category. 

For unincorporated businesses and leasing companies, the Annual Investment Allowance and the 40% first-year allowance can be claimed in the same period, depending on the amount of expenditure.

These valuable upfront allowances are synonymous with each other and are often discussed and considered interchangeably.  With this close relationship in mind, we set out here where each is mutually different and similar:

Differences

Annual Investment Allowance	Full expensing / 50% first-year allowance	40% first-year allowance
Introduced in 2008	Introduced in 2023 (50% FYA in 2021)	Expenditure incurred from 1 January 2026
It is not a first-year allowance	It is a first-year allowance	It is a first-year allowance
Available on acquiring both new and second-hand plant or machinery	Only available on acquiring new plant or machinery (main rate and special rate)	Only available on acquiring new main rate plant or machinery
Available to individuals, companies and most partnerships	Only available to companies chargeable to UK corporation tax	Available to individuals, companies and partnerships
Not available to mixed partnerships	Available to the corporate members of a partnership	Available to mixed partnerships
Time-apportioned for periods that are shorter or longer than 12 months	Not time-apportioned	Not time-apportioned
Limited to £1 million per period	No limit on expenditure amount	No limit on expenditure amount
The £1 million limit is applied as a whole to a group of companies or to all entities under common control	Available to each individual company, irrespective of being part of a group or being under common control	Available to each individual company, irrespective of being part of a group or being under common control
Available on plant and machinery assets acquired for leasing	Not available on plant and machinery acquired for leasing (except for background plant and machinery)	Available on main rate plant and machinery acquired for leasing (except for overseas leasing)
Disposal value is recognised in the appropriate pool	Automatic balancing charge on disposal value for the asset claimed as full expensing or the 50% fya	Disposal value is recognised in the main pool

Similarities

Annual Investment Allowance, full expensing / 50% first-year allowance and the 40% first-year allowance

Can only be claimed for the period the expenditure is incurred

The plant or machinery must be owned in the period the expenditure is incurred, in order to claim

A reduced amount can be claimed

Not available on cars

Mutually exclusive – each cannot be claimed on the same expenditure

Not available on expenditure incurred in the final period

Not available if the plant or machinery is acquired as a gift

Pre-trading expenditure rules

For the vast majority of companies incurring under £1 million annual expenditure on plant and machinery, the unequivocal decision is to claim the Annual Investment Allowance, rather than full expensing / 50% first-year allowance.  This is of course because any special rate expenditure is 100% claimed in the first year, rather than 50% and also, in most cases, a balancing charge will not be suffered on disposal.  A consequential advantage of claiming the Annual Investment Allowance, is the assets in question will not have to be individually tracked.

The vast majority of unincorporated businesses and leasing businesses incurring under £1 million annual expenditure on main rate plant and machinery, will claim the Annual Investment Allowance if available, rather than the 40% first-year allowance.    

© Smith Kelland Limited

This is for general information purposes only. It is not advice and is not intended to be advice.