Since 1 January 2019, the Annual Investment Allowance (AIA) for capital allowances has been set at £1million – helping businesses to make tax-efficient investments.

However, from 1 January 2021, the AIA will fall back to just £200,000 and thus reduce the amount of tax that could potentially be saved.

By using the AIA, companies can claim against most qualifying plant and machinery expenditure allowing them to deduct the total value of the investment from their profits. This, in turn, can mitigate their tax bill.

If a business has any plans in the pipeline that involve significant capital expenditure, they may want to consider accelerating these claims in 2020 to take advantage of the higher allowance that is available this year.

Where a company has a 31 December year-end, they can take full advantage of the £1million allowance this year; only qualifying expenditure after the year-end will be subject to the lesser £200,000 AIA limit.

However, for companies whose year-end falls after 31 December 2020 the position is a little more complex.

The AIA limit would be determined by considering the proportion of time within the accounting period that falls within the year 2020.


A company has a year-end on 30 June 2021.

They will be apportioned six months of the previous allowance (£500,000), plus six months of the new allowance (£100,000).

As a result, they may be able to claim up to £600,000 in AIA. However there is a trap in that of the potential £600,000 only £100,000 would be able to spent after 31 December 2020 (6/12 of £200,000).

Businesses can also take advantage of tax planning opportunities by entering into an unconditional contract on or before 31 December to purchase the qualifying expenditure, and benefit from the relief on offer this year.

Tax Partner, Barry Jefferd, comments: “As an advocate of proactive tax planning, there has never been a more pertinent time to get your affairs in order – considering the period of economic uncertainty that we have experienced, still are experiencing and will likely continue to experience for some time.

The Chancellor had been urged to keep the AIA at £1 million, and we were hopeful that this would be announced in the autumn budget, but now we are not having a budget this may affect any announcement.

“Where AIA is concerned, clearly the difference between £1million and £200,000 is significant. If you have capital expenditure plans in the pipeline, now would be the time to consider how the change in limit will interact with your year-end, if at all.

“Making sure you know what you are going to be able to claim, in advance of actually claiming, will eliminate any surprises. Ignorance is not always bliss, as the saying would suggest.”

How can George Hay help?

Our experts understand that tax is an integral consideration when it comes to having control of your business and the ability to plan effectively.

We aim to save you time and eliminate confusion whilst also maximising your tax efficiency wherever possible. To find out more about how we can help you and your business, contact the team today.

Link: Claim capital allowances

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