If you’ve been planning to invest in new plant and machinery, and that investment is likely to cost more than £25,000, our advice is to do it fast. At the end of this tax year, the Annual Investment Allowance (AIA) is reducing from £100k to just £25k

The Annual Investment Allowance enables businesses to claim full tax relief on most capital expenditure in the year it is incurred. Currently, the maximum amount that can be deducted from taxable profits is quite a generous £100,000. Effectively, this means that for every £1 a company on the upper rate invests in new equipment, up to 26p can be saved in taxable profits. However, when April 2012 rolls around, things will be much different.

To see this as a working example, let’s imagine a manufacturing company which is planning to invest in a new production line at a cost of £110,000. If they make the commitment before the end of this year, the manufacturer can allocate the first £100,000 of expenditure against the AIA. The remaining £10,000 would receive tax relief at 20% a year on a decreasing balance, thereby saving tax at say 20% on £2,000 in year 1, then 20% on the reduced balance of £8,000 in year 2 and so on.

Make the investment next year, however, and the sums look rather different. Just £25,000 of the expenditure would be eligible for full tax relief under the AIA. The remaining £85,000 would be subject to tax relief of just 20% (or 18% from April 2012).

Companies would save at either 26% or 20% (small company rate) for the 2011 year. Individuals and partnerships who pay tax at income tax rates  save at personal tax rates, which can of course range up to 50% in some cases where their total taxable earnings exceed £150,000. The basic rate tax band now goes up to earnings above £35,000 p.a. after personal allowances, so any profits of sole traders or partners above these levels will save tax at 40%.

It is estimated that a whopping 100,000 to 200,000 businesses have an annual capital expenditure of over £25,000, so this change will have a significant affect. If your company falls within this bracket, we highly recommend that you think about bringing any large spends forward – including, perhaps, investments which are planned for early part of next year. The amount of money which could be saved should far outweigh any expense incurred in changing those plans. As ever, we would be happy to work out the tax benefits for you and ensure that you optimise your finances.

Feel free to contact our dedicated tax team to discuss how the changes to AIA could affect your business.