Research and analysis

Executive Summary: Evaluation of the Annual Investment Allowance

Published 28 May 2025

Prepared by IFF Research and Frontier Economics for HM Revenue and Customs. The views in this report are the authors’ own and do not necessarily reflect those of HM Revenue and Customs

HM Revenue and Customs (HMRC) Research Report 779 

1. Executive summary  

1.1 Introduction   

The Annual Investment Allowance (AIA) is a capital allowance that allows a business to deduct 100% of qualifying expenditure on plant and machinery from the business’ profits before tax up to a specified annual limit. The annual limit of the AIA has undergone several changes since it was introduced in April 2008 (see Appendix B: Changes to the AIA threshold). The AIA threshold is currently set at £1,000,000 until March 2023.  

In February 2021, HMRC commissioned IFF Research and Frontier Economics to evaluate the AIA. The objectives of the evaluation were to:  

• assess whether the AIA tax relief is meeting its original objectives   

• identify the direct and indirect effects of the AIA tax relief  

• explore whether the AIA tax relief is appropriate (that is whether other forms of support would have been better)  

• establish if the AIA tax relief is proportional or whether the same outcome could have been achieved with a lower rate of AIA tax relief  

To meet the objectives outlined above, a multi stranded evaluation methodology approach was adopted. This consisted of:  

• quantitative telephone surveys of claimant businesses (850 interviews) and non-claimant businesses (500 interviews)

• qualitative depth interviews with claimant businesses (40 interviews) and non-claimant businesses (10 interviews) that participated in the quantitative surveys  

• econometric analysis of HMRC corporation tax data (CT600) and business data in FAME

1.2 Characteristics of the population  

Claimants of the AIA made up around 25% of all UK corporations and were more likely to be in capital intensive sectors, namely production and construction, information and communication and professional, scientific and technical services.   

Total AIA claims made up around 10% of total UK capital investment. The value of AIA claims were notably higher amongst corporations in capital intensive industries, companies that paid in quarterly instalments and those with more employees. Companies headquartered in Northern Ireland claimed the highest proportion on the AIA, followed by those in Scotland, London and the North East.  

With regards to the survey population, interviews were conducted with claimant and non-claimant businesses in a variety of sectors, size-bands and regions. Interviews were also completed with a mix of incorporated and unincorporated businesses.  

1.3 Investment behaviour  

Both claimant and non-claimant businesses that made investments in plant and machinery were generally motivated by an attempt to improve productivity and or efficiency. Some businesses said that capital investments were made because of an essential need for equipment.   

Non-claimant businesses that had not invested in plant and machinery in 2019 to 2020 widely attributed this to there being no business need for new equipment at that time. These businesses generally had no intentions of making investments in business equipment over the next five years.   

For the most common types of capital investments were IT equipment (claimants: 63%; non-claimants: 38%), office equipment (claimants: 44%; non-claimants: 36%) and machinery and tools (claimants: 48%; non-claimants: 33%). Notably, for the majority (99%) of non-claimant businesses, investment was made in equipment eligible for the AIA.  

Econometric analysis found that AIA claims tend to be small (median of £3,000, mean of £20,000), with small numbers of corporations claiming high amounts. Though there were close similarities in the types of equipment invested in, on average claimant businesses had invested significantly more than non-claimant businesses.   

1.4 Awareness and understanding of the AIA  

Claimants were often unaware that they or their business had claimed the AIA. Most claimants contacted (55%) were unaware of the claim, whilst 45% were aware. Almost two-fifths (38%) of claimants contacted were unaware the AIA existed.   

Use of a tax agent or accountant heavily influenced awareness. Claimants who used tax agents were twice as likely to be unaware their business had claimed (33% versus 16% of non-users of tax agents). Amongst those who were aware of their claim, half (51%) had first heard of the AIA via their tax agent.   

Understanding of how the AIA could be used varied amongst aware claimants. Around half (54%) were confident they understood the types of investment it could be used for, while around two fifths (42%) were not.   

1.5 The influence of the AIA on investment behaviour  

As a result of the increase in the AIA threshold from £250,000 to £500,000 in April 2014, it is estimated that firms affected by the change invested between 0% and 9% more than they otherwise would have done in plant and machinery on average each year in the two years following the reform.  

The mid-point of the estimate suggests that firms affected by the change invested between 4% and 5% more than they otherwise would have, equivalent to an increase in yearly investment of £186 million. This estimate is based on increases in investment only for the companies affected by the threshold change (around 14,000 companies), which are those with predicted investment between £250,000 and £500,000 in the year of the change.  

Companies that pay taxes in quarterly instalments possibly reacted more to the AIA due to a potential cashflow effect. There was some evidence that capital intensive companies reacted more to changes in the AIA than capital light ones, although the impact was found only to be significant for the largest thresholds.   

The AIA was generally not identified by claimants as a key consideration in their investment decisions. Most claimants explained that they had invested in equipment for potential gains to the business or because of an essential need. This is unsurprising given that claimants were often unaware that their business had claimed the AIA.    

Claimants that were aware of the relief typically agreed that it incentivises businesses to invest in plant and machinery (65%). Furthermore, most agreed the AIA enables more frequent (57%) and larger (53%) investments.   

1.6 Use of the AIA  

Reflecting the most common types of capital investments made, AIA claims were most commonly made on IT equipment (59% of aware claimants), machinery and tools (44%) and office equipment (40%).   

The main motivation for using the AIA was to reduce the tax bill (41%) and many were prompted to do so by an agent (36%). Some were aware of the specific benefits of the AIA and a few financially savvy respondents in qualitative interviews discussed how the AIA could be incorporated into tax planning.  

1.7 Experiences of non-claimants  

Most non-claimants had never claimed nor considered claiming the AIA (97%) – only 1% were past claimants and a further 2% had considered claiming.  

Among those that were aware of the relief but had not claimed it, this was most commonly because their investment was not perceived to be substantial enough or because there was no business need to invest (26% and 25% respectively).  

Even among non-claimants that were aware of the AIA, some reasons for not claiming demonstrated a lack of awareness  for example, being unaware of the AIA at the time the investment was made (10%) or being unsure what the AIA could be claimed for (13%).  

1.8 Appropriateness of the AIA   

Most claimants (69%) would have spent the same amount on investments if offered an upfront grant or subsidy instead of the AIA, as capital investments were influenced more by business need than anything else.   

However, just over a quarter of claimants (27%) would have been incentivised to spend more if offered a grant instead. The majority of these (70%) would have increased their spending by up to 50% more in this case. This was because a grant would facilitate them to invest without relying on retained profits, and therefore help with cashflow.   

Among non-claimants, three in five (58%) of those who invested in the tax year 2019 to 2020, and seven in ten (69%) of those who didn’t invest would not have been influenced in their investment behaviour by the offer of a grant, for the same key reason given by claimants, that they prioritised business need when making investment decisions over the availability of government subsidy.  

1.9 Proportionality of the AIA   

Four in five aware claimants said that a lower AIA rate (that is the AIA relieving a smaller proportion of the total cost of the investment) would not have influenced the size of their investment (84% if the AIA had a rate of 75%, and 80% if the AIA had a rate of 50%). As investments were mostly driven by necessity, in most cases the rate of the AIA was not a key consideration when investing.   

Just over a third of claimant businesses (35% in each scenario) would be incentivised to spend more on investments if the AIA provided relief in excess of the cost of investment, at the 125% or 150% rate of relief. This decision would still be determined by business need, and the higher investment would mainly be used to purchase higher quality equipment.  

1.10 Wider impacts of the AIA  

A large majority of claimants were positive about the overall impact the AIA had on their own business, with 89% who were aware of a recent claim agreeing that the relief had a beneficial effect. Specifically, most aware claimants agreed that it helped with business growth (74%) and cash flow (55%).  

There is limited econometric evidence of the AIA’s impact on company turnover in the two years following a threshold change. Econometric analysis found a small positive impact, but it is not significantly different from zero.  

A large majority (81%) of claimants of the AIA agreed that the AIA benefits the UK economy generally. Four-fifths (80%) agreed it helps to stimulate growth in the economy (80%), while around two-thirds also agreed it helps to increase the UK’s output (69%), improve productivity (68%) and fuel innovation (65%).  

1.11 Future use of the AIA  

More than half (56%) of non-claimants who have never claimed AIA before said they were likely to consider claiming the AIA on investments in plant and machinery in the next five years. Most attributed this to a desire to save money and reduce tax payments.   

A third (33%) of non-claimants who have never claimed AIA before said they were unlikely to consider claiming the relief in the next five years. Though, a quarter (24%) of these businesses said they would consider claiming the relief if there was a business need for investment in plant and machinery.