Annual Investment Allowance – Budget 2021 date extension to £1m limit

In the Chancellor’s Autumn Budget Speech 2021 he announced a further date extension of the £1m annual investment allowance limit from 31 December 2021 to 31 March 2023, but what does that mean for businesses?

Businesses often need to make capital investments in order to improve efficiencies, expand or simply keep up with the latest technology.

When the level of the Annual Investment Allowance (AIA) was first introduced in 2008 it was to encourage investment and allowed businesses to write off 100% of the cost of qualifying assets against their taxable profits, up to a certain limit.

This limit started at £50,000 and has been as high as £1m since 1 January 2019. This £1m temporary increase to encourage investment was due to come to an end on 31 December 2021 where it was to revert to the previous ‘permanent’ rate of £200,000, which is a significant reduction.

Many businesses may have been planning to incur significant capital expenditure by 31 December 2021 in order to achieve 100% tax relief before the limit is cut. Today’s announcement takes some of the timing pressure off as the £1m limit will now remain until 31 March 2023 which is welcome news.

Since 1 April 2021, many companies have been update to benefit from the 130% super-deduction or 50% first year allowances that were announced in the Spring Budget. However, these new first year allowances are not available to unincorporated businesses who rely on AIA to get 100% tax relief on a significant amount of expenditure.

Whether the AIA does eventually reduce back down to the ‘permanent’ rate of £200,000 from April 2023 remains to be seen. When there is a reduction in AIA rate then care is needed to ensure that capital expenditure is not left until too late to achieve full relief due to the complex way in which the relief is time apportioned and restricted.

If you have any questions regarding obtaining tax relief for capital expenditure please do contact me or your local PKF Francis Clark adviser.