Capital Allowances ‘Super Deduction’

In March 2021, our current Prime Minister Rishi Sunak, in his previous role as Chancellor, announced the introduction of a temporary first year allowance, called the ‘super deduction’, designed to try and help with the economic recovery from the pandemic.

In this blog, we take a look at what this ‘super deduction’ is and why time is running out to take advantage of it.

Capital Allowances- what are they?

Capital allowances are a type of tax relief that businesses can claim, meaning some or all of the value of an item can be deducted from the business’ profits before tax. These can be claimed on items such as equipment, machinery and business vehicles.

There are a variety of different types of allowances that can be claimed, depending on the item it is being claimed on. The standard ones are:

  • Annual investment allowance (AIA)- the full value of the item can be deducted. Currently, up to £1million can be claimed on certain plant and machinery.
  • 100% first year allowance (FYA)- the full amount can be claimed for certain plant and machinery in the year it was bought.
  • Writing down allowance (WDA)- this can be claimed if the item doesn’t qualify for AIA (or the maximum amount has already been claimed) or FYA. With WDAs, there are three types of ‘pool’ that the item can be grouped in depending on the rate that they qualify for, varying between 18% and 6% tax relief.
Super Deduction

As mentioned above, this was brought in as an additional allowance from 1st April 2021. This super deduction allowance is applicable to all new plant and machinery that ordinarily would qualify for the 18% main pool WDA. The super deduction allowance allows corporation tax relief of 130% of the qualifying cost.

So as a basic example, a company purchases a £10,000 asset that would have previously qualified for 18% WDA, meaning that £1,800 of the asset amount could have been deducted from the company’s profit before tax in the first year (and each year thereafter until the full asset amount has been utilized). With the super deduction allowance, instead, the company would be able to deduct 130% of the asset amount from their profit before tax in the first year, so £13,000!

But… time is running out!

Unfortunately, although probably unsurprisingly, this super deduction was only ever a temporary measure and is due to end on 31st March 2023. Therefore, if you want to take advantage of this allowance, you would need to be purchasing the qualifying, new item before 31st March.

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