Annual Investment Allowance - Beware of the transitional rules.

Article | Judith Pederzolli | 5th May 2022

If you have any questions or concerns please do not hesitate to speak to your PEM contacts directly

Speak to someone
Updated: 5 May 2022
Capital allowances offer a valuable tax benefit to those businesses investing in capital purchases. The Annual Investment Allowance (‘AIA’) is a relatively straight forward and generous allowance that most businesses can benefit from. This is different to the temporary “super deduction”, which is explained in a separate article (https://www.pem.co.uk/article/the-super-deduction-an-unexpected-impact/).

Since 1 January 2019, businesses have been entitled to 100% relief for the first £1,000,000 spent on plant and machinery which qualify for capital allowances, including integral features but excluding cars. This was an increase of £800,000 from the previous allowance of only £200,000.

The AIA has been at £1m since this point, and is now scheduled to revert to £200,000 from 1 April 2023. The transitional rules which cover this reduction in the AIA mean that the timing of capital expenditure is crucial in order to maximise the immediate tax relief.

It is worth considering whether any new plant and machinery purchased by companies before 1 April 2023 instead qualifies for the super deduction first year allowance, which gives relief at a higher rate of 130% for qualifying expenditure (this is not available to sole traders or partnerships). Any available AIA can then be reserved for expenditure on integral features which do not qualify for super deduction at 130%.

Transitional rules

If your business’s year end straddles the 1 April 2023 then the transitional rules could mean your tax relief is significantly delayed if you incur expenditure on or after 1 April 2023. Below is an example of how the transitional rules work:

For a company with a year end of 31 December 2023 the AIA for the period is calculated as:

1 January 2023 to 31 March 2023 – £1,000,000 x 3/12 = £250,000.

1 April 2023 to 31 December 2023 – £200,000 x 9/12 = £150,000.

This gives a total AIA of £400,000.

Unfortunately, it is not simply a case of £400,000 being available for the whole period, instead the AIA for the pre and post 1 April 2023 periods are capped at their own pro-rated value.

For example, if a company spent £250,000 on air conditioning installations in January 2023, the entire cost would be covered by the AIA.

However, if the same £250,000 expenditure was incurred on or after 1 April 2023, only £150,000 would attract the AIA and the remainder of £100,000 would receive a writing down allowance at 6%, as this is a special rate pool item. The balance of the tax relief would be received on a 6% reducing balance basis over future years.

If you are thinking of incurring significant capital expenditure in your business, we would generally recommend that you seek tax advice first, but this is currently more important than ever, given that timing is key when it comes to securing the best Annual Investment Allowance outcome.

Please contact us if you would like to discuss this further.

If you are thinking of incurring significant capital expenditure in your business, we would generally recommend that you seek tax advice first, but this is currently more important than ever, given that timing is key when it comes to securing the best Annual Investment Allowance outcome.

Please contact us if you would like to discuss this further.

About the author

Judith Pederzolli

Judith joined PEM in 2001 and specialises in the property and not for profit sectors. Judith is primarily involved in tax advisory Read more …

Sign up to receive practical guidance on CORONAVIRUS (COVID-19)

Sign up