Introduced in 2021, the super deduction is a major tax break for business investment, but it’s not here forever. Here’s what you need to know to make the most of it.
What is the super deduction?
To get the economy going again post-Covid, the Chancellor introduced the super deduction as one of his key initiatives – encouraging companies to buy assets and gain extra tax breaks in doing so.
It essentially allows you to slash your tax bill when you invest in qualifying assets, by claiming 130% of their cost as a first-year capital allowance.
What types of purchases qualify for the super deduction?
To qualify, a limited company needs to purchase assets classed as ‘plant and machinery’ by HMRC between 1st April 2021 and 31st March 2023.
There’s no exhaustive list, but there’s plenty you can benefit from, including computer equipment, manufacturing equipment, lorries and vans, farming and construction vehicles, office furniture, and electrical vehicle charging points.
Most of these assets are eligible for the 130% super deduction, but they must be new and purchased for use in your business. You can buy them outright or use hire purchase, but leasing does not qualify.
While cars, buildings and structures are specifically excluded from the super deduction, you may be able to claim a 50% first-year allowance for ‘special rate’ assets – which include integral features of buildings like lifts, escalators, air conditioning, heating and electrical systems.
This extra relief is only temporary, though, and stops on 31st March 2023. To claim it, you’ll need to have ordered – and be in possession of – your new assets by that point.
An example in practice
Say your company buys new computer equipment, desks and chairs for your new office with a value of £25,000. Using the super deduction rules, you can inflate their value to 130% of the original cost – and offset that against your corporate tax bill.
So, £25,000 x 130% would give you £32,500 to offset against your corporation tax. The extra tax saved by using the super deduction comes from the increase in the asset value (£7,500). The tax saved in this example would be £7,500 x 19% (corporation tax rate) = £1425.
The government has introduced this tax break to encourage businesses to invest or bring investment forward. If you’re thinking about purchasing qualifying assets as part of your long-term growth strategy, it’s wise to start thinking about doing it now (remembering that there are delays on lots of purchases at the moment!)
Because the super deduction is claimed on corporation tax, only limited companies can benefit. If you’re set up as a sole trader or partnership, you could consider incorporating if you plan to invest significantly. But this is a complex decision with other factors to evaluate, so don’t rush into it and take advice if necessary.
Tax breaks come and go for individuals and businesses, but if you’re looking to invest in your business this is a good one to catch while you can, as HMRC is essentially offering a discount on all new qualifying assets if you buy before the end of March 2023.
Whatever your situation, if you would like to discuss the super deduction with our experts, get in touch.