Capital allowances £1m ‘Annual Investment Allowance (AIA)’ extended to 31 December 2021

In a written ministerial statement (see here) from Jesse Norman (Financial Secretary to the Treasury) it was announced that the £1m AIA was to be extended to 31 December 2021.

The Government’s news story can be found here.

As we explained in our recent tax blog post (see here), the temporary £1m limit was previously set to end on 31 December 2020 and the limit set to reduce to £200,000 after a 2 year period of being set at £1m.

Reductions to the AIA always pose an issue for businesses planning capital spend, and given the current challenges the business community faces (COVID-19, impending end of the Brexit transitional period etc), the extension is clearly welcomed.

The extension does, however, highlight the issues with the constant changes to the AIA limit that have blighted the allowance since its inception.

We can only hope that the AIA £1m limit is made a permanent limit.

Changes to the AIA – key dates

The amount of the AIA was increased to £1,000,000 from 1 January 2019 until 31 December 2020. The government has now announced an extension until 31 December 2021. The extension is intended to boost confidence as companies look to weather the pandemic and plan for the future. The planned reduction in AIA will be £200,000 for expenditure incurred after this date.

How does the AIA interact with accounting periods of the business?

The AIA is an annual allowance and the maximum AIA is computed by reference to the accounting period of the business. If the accounting period straddles the date when the AIA is reduced, a pro rata calculation of the maximum entitlement is required.

Looking ahead to the reduction in AIA to £200,000 on 1 January 2022, the maximum allowance for an accounting period straddling that date is the sum of:

  • the maximum AIA entitlement based on the £1,000,000 annual cap for the portion of the accounting period falling before 1 January 2022; and
  • the maximum AIA entitlement based on the £200,000 cap for the portion of the accounting period falling on or after 1 January 2022.


A company makes up its accounts to 31 March annually. For the year to 31 March 2022, the limit is calculated as follows:

April 2021 - December 20219/12 x £1,000,000= 750,000
January 2022 - March 20223/12 x £200,000= 50,000
Total 800,000

Does it matter when the expenditure is incurred in the accounting period?

Yes, it does. For expenditure incurred before 1 January 2022, there is a limit to the maximum figure available. The maximum allowance is the AIA in the computation above, namely £800,000.

However, if expenditure is incurred on or after 1 January to 31 March 2022, the maximum amount of relief will only be £50,000.

So, the important point to be aware of is the need to incur any substantial capital expenditure before 1 January 2022 irrespective of the accounting period of the business.

Further points to be aware of

  • AIA it is not available for expenditure on cars.
  • Certain businesses are not entitled to any AIA.
  • In some situations, a business may not be entitled to the AIA as computed above as the AIA limits may need to be shared with other businesses, which are under common ownership.
  • There are special rules for determining the date of when capital expenditure is incurred for tax purposes in some circumstances. Please contact us if a contract is being signed with a credit period of more than four months or a hire purchase agreement is being entered into.