What is the Annual Investment Allowance and how does it work for sole traders?

The Annual Investment Allowance (AIA) allows sole traders to deduct the full cost of qualifying plant and machinery in the tax year of purchase, up to a limit of £1 million per year (as of 2024/25). Qualifying items include: computers, machinery, tools, vehicles (except cars), office furniture, and equipment used in your business. Cars are excluded from AIA and must be claimed via writing-down allowances instead. For example, if you buy a £2,000 laptop and a £500 camera for your business, you can claim the full £2,500 as a deduction in that tax year — reducing your taxable profit by £2,500. If you use the item for both business and personal purposes, you can only claim the business-use proportion. For cash basis accounting users (most sole traders), you simply expense purchases as they occur without needing to use AIA — it is the same result.

• AIA lets you deduct the full cost of equipment in the year of purchase
• £1 million AIA limit per year — covers all typical sole trader equipment purchases
• Qualifying items: computers, tools, machinery, furniture — but NOT cars
• Cars use writing-down allowances instead (18% or 6% pool)
• Claim only the business-use proportion if the item has personal use too