So here's what I've come up with.
- Any time a character is damaged in combat they can choose to subtract up to 3hp from the damage suffered, in exchange for their armour's effectiveness being reduced by as many points. This should be noted on the character sheet. (DM's discretion whether this applies to stuff like lightning bolts or dragon breath as well as normal attacks.)
- Damaged armour can be repaired by skilled blacksmiths / leather workers, for a price. The cost depends on how badly damaged the armour is. Any armour which is reduced to AC 9 is beyond repair.
Studded leather: from AC 8 = 20gp.
Scale mail: from AC 8 = 40gp, from AC 7 = 30gp.
Chain mail: from AC 8 = 60gp, from AC 7 = 45gp, from AC 6 = 30gp.
Splint mail: from AC 8 = 65gp, from AC 7 = 55gp, from AC 6 = 45gp, from AC 5 = 35gp.
Banded mail: from AC 8 = 75gp, from AC 7 = 65gp, from AC 6 = 50gp, from AC 5 = 40gp.
Plate mail: from AC 8 = 400gp, from AC 7 = 350gp, from AC 6 = 290gp, from AC 5 = 220gp, from AC 4 = 150gp.
I think the system is simple enough that it won't cause a great impediment during play, the most complex part being the repair costs, which are irrelevant in the heat of combat. And I feel like it's not unbalancing -- it gives low level PCs a slight boost, but at the expense of money, which is usually a bit tight until 2nd level. Of course for higher level characters with a few more hit points to throw around, there's also a nice trade-off effect -- a short term reduction in damage taken vs a longer term reduction in armour class.