The Annual Investment Allowance (AIA) is a capital allowance that enables you to claim an immediate deduction against your profits for qualifying capital expenditure up to the available limit. The AIA limit was temporarily increased from £200,000 to £1 million from 1 January 2019 to 31 December 2021. It was due to return to its permanent level of £200,000 from 1 January 2022. However, the Chancellor announced in his Autumn Budget that the temporary limit will be extended until 31 March 2023.
The announcement allows more time to take advantage of the higher temporary limit. If you are intending to spend more than £200,000 on plant and machinery that qualifies for the AIA, you now have until 31 March 2023 to benefit from the higher allowance and immediate relief for your expenditure.
The AIA limit for your accounting period depends on when that period falls and on the length of that period. The limit is proportionately reduced for accounting periods of less than 12 months.
If your accounting period is 12 months in length and falls wholly within the period running from 1 January 2019 to 31 March 2023, the AIA limit for the period is the temporary amount of £1 million.
Consequently, if your accounting period ends on or before 31 March 2023, you will be able to benefit from the £1 million limit.
Calculating your AIA limit is more complicated if your accounting periods spans 31 March 2023 as transitional rules apply.
If you are planning capital expenditure in an accounting period that spans 31 March 2023, you will need to be aware of the transitional rules. Depending on the level of investment planned, it may be advisable to incur it prior to 31 March 2023, rather than after this date.
Companies are able to benefit from a ‘super-deduction’ equal to 130% of qualifying expenditure incurred in the period from 1 April 2021 to 31 March 2023. It applies where the expenditure would be eligible for main rate writing-down allowances of 18%. This is a better option than the AIA as it secures a higher rate of relief. However, unincorporated businesses are unable to benefit from the super-deduction.
Companies can also benefit from a 50% first-year allowance for expenditure incurred in the same window where the expenditure would qualify for reduced rate writing-down allowances of 6%. However, where the AIA is available, this is preferable to claiming the first-year allowance as will give relief at the rate of 100% of the expenditure, rather than at the rate of 50%.
To benefit from both the super-deduction and the 50% first-year allowance, companies must incur the qualifying expenditure on or before 31 March 2023.
If you are planning significant capital expenditure, speak to us to find out how to maximise your available capital allowances. The timing of the expenditure will affect the allowances that are available to you.