What is the Super Deduction?

A blog by Matt Spurling

So, what is the Super Deduction?

To understand super-deductions first we must be aware of what capital allowances are and how they work. Capital allowances are expenditure your business can claim back against taxable profits, they may be claimed on most assets within your business and the rate they can be claimed varies from asset to asset and the current HMRC allowances, such as the current super deduction.

The super-deduction or enhanced capital allowances, means that from 1st April 2021 to 31st March 2023 any investments your business makes in plant and machinery will qualify for:

  • A 130% super-deduction capital allowance on main rate (main pool) plant and machinery.
  • A 50% first year allowance for special rate (long life assets).

These deductions mean that investments in qualifying assets until April 2023 could give your company greater tax relief in the year of purchase than what would normally occur.

What is the Super Deduction?

What the rules to claim super-deduction?

Firstly, to claim the super deduction you must be paying corporation tax, this means if you are a sole trader or partnership, unfortunately you are not eligible.

Other rules include criteria such as that the asset purchased must be new and unused? There are complex rules around assets that are leased but is still something that can be looked in to.

Further to this, the super-deduction cannot be claimed on cars, but most commercial vehicles and vans should be permitted.

Unlike Annual Investment Allowance, there is no limit to the investments that can qualify for the super-deduction or SR allowance.

Asset ClassCA ClaimAsset TypeCA Rate
Main Pool Plant and Machinery~ Super deduction~ New~ 130%
~ AIA (max £1m)~ All~ 100%
~ Main Pool~ Second hand~ 18%
Special Rate (generally long life > 25 years)> AIA (max £1m)> All> 100%
> SR Deduction> New> 50%
> Pool> Second hand> 6%

 

Why has the government introduced a super-deduction?

The reason for the introduction of the super-deduction is to try and increase business investment, the government fact sheet states “since the Covid-19 pandemic, existing low levels of business investment have fallen, with a reduction of 11.6% between Q3 2019 and Q3 2020”. The fact sheet also states that “making capital allowances more generous works to stimulate business investment. As a result, these measures can promote economic growth”. So, the overall goal is to try and boost the UKs economy in the recovery of pandemic. Click here to view the government factsheet.

How does it work?

The easiest way to explain how this actually benefits you is to look at the numbers. Below is an example of how it is calculated and what it means for your tax bill:

In your accounting period, your business spends £20,000 on qualifying main rate investments. You would be able to claim 130% capital allowance on this. So, when calculating your total taxable profits £26,000 of capital allowances would be deducted from your taxable profits – being the £20,000 x 130%. This therefore would reduce your profits on which corporation tax is charged, leading to a tax saving of 19% of the £26,000 so in this case, you would save £4,940.

Before the super deduction was introduced, you would only be able to claim 100% of the cost of your capital allowances, so if you invested in £20,000 of qualifying meaning you would save tax at 19% of this which would be £3,800. Therefore, the super-deduction means you would be £1,140 better off!

How to make the most of the super-deduction?

Whilst it is always advisable to maximise a business’s tax savings, this doesn’t mean that you should go out with the intention of investing in a number of qualifying assets that may not benefit your business just to try and bring your tax bill down as much as possible.

As always, the best way to approach the super-deduction is to plan ahead. If you would like to discuss tax planning, please contact a member of our client advisory team, or call us on 01284 755956.