£1 million Annual Investment Allowance

In the Spring Budget earlier this year, the government announced that the temporary Annual Investment Allowance (AIA) cap of £1 million would be extended until 31 December 2021. The Chancellor, delivering the Autumn Budget revealed that the temporary cap will now be extended further until 31 March 2023.

The government says that this move is intended to have positive outcomes for businesses by supporting and encouraging business investment, particularly those that are ineligible for the super-deduction, and by simplifying the tax relief for such investment. The change should also encourage investment on qualifying plant and machinery.

The AIA allows for a 100% tax deduction on qualifying expenditure on plant and machinery to be deducted from your profits before tax. The relief is normally capped at £200,000 per annum but was initially increased to £1 million from 1 January 2019.

This temporary limit of £1 million is a generous allowance and should cover the annual spend of most small and medium-sized businesses. The AIA is available for most assets purchased by a business, such as machines and tools, vans, lorries, diggers, office equipment, building fixtures and computers. The AIA does not apply to cars.

The extension in the temporary limit means that businesses thinking of incurring large items of capital expenditure will now have additional time to consider their options during these uncertain times. There are complex transitional rules so the timing of any purchase should be carefully considered.

However, companies could claim the new super-deduction for purchases of qualifying equipment up to 31 March 2023. As this relief effectively provides a 130% deduction, this would be the better option. Unfortunately, this super-deduction is not available to self-employed traders or partnerships.