Update (26 April 2018): The Annual Investment Allowance (AIA) has been reduced from £500,000 to £200,000 from 1 January 2016 

The Annual Investment Allowance (AIA), which allows businesses to invest in new plant and machinery for maximum tax benefits, was initially cut from £100,000 to £25,000 by the coalition.

However, in an effort to provide more tax aid to businesses, chancellor George Osborne has improved on its increase to £250,000 in 2012 by doubling it. Going forward, the AIA has been extended to 2015 and will now be worth £500,000.

The AIA is a kind of capital allowance, which offers tax relief at 100 per cent on qualifying expenditure in the year of purchase. The maximum businesses can deduct from your taxable profits is now set to be £500,000. This pro-rates for short or long periods, and also for periods that span the operative dates and rates of allowance.

Vince McLoughlin, partner at Russell New, says, ‘The government needed to make it easier for small and medium sized businesses to access funding to maintain the perceived growth in the economy.

‘The temporary limit of £250,000 [of the AIA] would have ended in December. Without an increase, then businesses would have been rushing to maximise the opportunities to use their AIA by planning the timing of their capital expenditure across the rest of this year.‘

More on the Annual Investment Allowance:

• Autumn Statement 2012: Ten-fold increase to AIA
• What is the AIA?
• Top eight tax breaks for business owners

The cost to implement the policy is set to be £2 billion, but is a reflection of the government’s desire to back businesses which are looking to invest. According to the chancellor, some 99.8 per cent of businesses will pay no tax on investment.

Frank Nash, tax partner at Blick Rothenberg, comments, ‘The generous extension and enhancement of the investment allowance for businesses is necessary because so much projected growth is based on UK infrastructure projects.

‘All suppliers in the chain will require these tax allowances indefinitely. Hopefully the previously inadequate £25,000 cap is consigned to history.‘

More on the Budget 2014:

• Full transcript of George Osborne’s speech
• Osborne unveils ‘most competitive export finance in Europe’