Chartered Accountants and Professional Business Advisers

A Time to Buy?

“Will the Government really fund half of my IT upgrade?”

“I want to do something today that helps all businesses invest” said George Osborne in his Budget speech last month.

That ‘something’ was to double the Annual Investment Allowance (AIA) to half a million pounds until 31 December 2015.

What is the Annual Investment Allowance?

If you run your own business you probably already know that tax relief on most large capital expenditure (i.e. cars, machinery, IT systems etc) is primarily given over a number of years, currently at a maximum of 18% per year. This means, whilst the real expenditure is up front, the reduction in your tax bill is spread over a long period broadly representing the life of the asset.

The AIA effectively gives a 100% deduction from your taxable profit in the year of purchase for the majority of assets (excluding cars).

What has changed?

In 2008, the AIA was introduced with an annual limit of £50,000 and later reduced to £25,000. George Osborne seems a fan, in 2013 he increased this to £250,000 and, in his 2014 Budget speech, increased it further to £500,000 for expenditure incurred from 1 April 2014 to 31 December 2015 .

To recap, that is 100% tax relief available on qualifying expenditure of up to half a million pounds incurred before 31 December 2015.

Then what?

Current legislation provides that from 1 January 2016 the AIA will revert to the £25,000 level.

So, what does that mean?

Tax relief for the capital expenditure incurred in the period qualifying for AIA is given as a straight 100% deduction from your taxable profit, thereby giving relief at your highest tax rate. For example:

  • Gary is a sole trader. He makes a profit of £200,000 a year and therefore pays tax at a top rate of 45% plus 2% national insurance. On the sum he pays for qualifying capital assets he will receive up to 47% of it back as a reduction in his tax bill for the year.
  • If Gary’s profits were in fact £80,000 a year his top rate of tax would be 40% plus 2% national insurance, effectively a saving of up to 42% on the cost of equipment or machinery.
  • Were Gary to operate via a limited company he would be paying corporation tax at 20%, leaving just 80% of the cost paid as his net cost.

Does your business require a significant outlay on plant and machinery in the near future? Have you been putting off investment in your business due to the costs? Then the AIA could be a huge benefit to your business right now, particularly if you are potentially spending in excess of £25,000.

So, if you are looking to invest in plant or machinery for your business be sure to contact your advisor to see how the AIA can work for you.

Specific advice should be obtained before taking action, or refraining from taking action, in relation to the above.

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