Since the Spring Budget 2023, UK businesses have had two main routes for 100% first-year relief on qualifying plant and machinery expenditure: the long-standing Annual Investment Allowance (AIA) and Full Expensing, which became permanent in the 2023 Autumn Statement. They overlap, but they are not the same. This comparison explains where each applies and how advisors should think about the choice in 2026.
What AIA Covers
AIA gives 100% first-year deduction on qualifying plant and machinery expenditure up to the annual limit (£1 million, made permanent by the Finance Act 2022). AIA is available to companies, sole traders and partnerships alike, applies to most plant and machinery including some second-hand assets and integral features, but excludes cars.
What Full Expensing Covers
Full Expensing gives 100% first-year deduction with no upper cap for companies subject to Corporation Tax on qualifying new and unused main-rate plant and machinery. A separate 50% first-year allowance applies to qualifying special-rate (long-life and integral features) expenditure.
Key restrictions: Full Expensing is for companies only - not for unincorporated traders - and the assets must be new and unused (not second-hand).
The Decision in Practice
For a sole trader or partnership, the choice does not arise - AIA is the only route. For a company under £1 million of qualifying spend, AIA and Full Expensing both give 100% deduction, but AIA is broader because it captures second-hand assets and the £1 million cap is more than enough for most. For a company spending above £1 million on new main-rate plant, Full Expensing becomes essential to capture the excess.
Disposal Considerations
When AIA-claimed assets are disposed of, a balancing charge applies in the normal way. Full Expensing introduces a specific disposal mechanism: 100% of the disposal proceeds are added back to taxable profit (or 50% for special-rate items relieved at 50%). This is more punitive than the AIA disposal treatment, so firms should consider holding-period intentions.
For long-life or low-disposal-value assets the effect is minimal. For assets likely to be sold within a few years at substantial value, the Full Expensing claw-back can erode the timing advantage.
Worked Example
A company buys £1.4 million of new main-rate plant in the accounting period. Option A: claim AIA on £1 million (100% deduction = £1 million) and writing-down allowance on £400,000 (18% = £72,000) - total first-year deduction £1.072 million. Option B: claim Full Expensing on all £1.4 million - total first-year deduction £1.4 million.
Full Expensing wins on first-year deduction but exposes the entire £1.4 million to the disposal claw-back. AIA is more conservative on first-year but cleaner on disposal.
Cars and Special-Rate Assets
Cars are excluded from both AIA and Full Expensing. Electric vehicles and zero-emission goods vehicles continue to attract their own first-year allowances. Special-rate pool assets (e.g. integral features, long-life assets) are eligible for the 50% first-year allowance under Full Expensing, or for AIA up to the £1 million cap.
Planning Implications
For most SME companies, AIA is sufficient and simpler. For larger companies and capital-intensive operations, Full Expensing unlocks deduction on spend above the £1 million cap. For unincorporated businesses, the question does not arise. Always model the disposal pattern before defaulting to Full Expensing on assets with expected resale value.
Verdict
AIA and Full Expensing are not directly competitive - they are complementary tools. Use AIA for the first £1 million of qualifying spend including second-hand assets, and use Full Expensing for company spend above that cap on new main-rate plant. Always check disposal exposure on Full Expensing before committing.