What is the super-deduction?

Super Deduction

What is the super-deduction?

The super deduction is a great opportunity for business owners like you to reduce your tax bill. According to the HM Treasury, it’s a “new 130% first-year capital allowance for qualifying plant and machinery assets; and a 50% first-year allowance for qualifying special rate assets.”

But what does all that mean? And how, exactly, can it help you and your business?

Here’s everything you need to know about the super-deduction:

 

What is it?

The super-deduction is a generous temporary tax break. It was announced in the spring budget of 2021 in order to encourage companies to buy new equipment and help the economy recover.

You may have bought equipment to reduce your corporation tax bill in the past. Basically, the government is allowing you to uplift what you spend on equipment to 130%, cutting your tax bill by up to 25 pence for every £1 you invest.

 

What can I spend it on?

The super-deduction is applicable for new, unused, qualifying equipment. Some examples of assets that qualify for the super-deduction are:

  • Computer equipment and servers
  • Tractors, lorries, vans
  • Ladders, drills, cranes
  • Office chairs and desks
  • Electric vehicle charge points
  • Refrigeration units

 

The super-deduction doesn’t apply to any leased or contract hired assets or assets purchased second hand.

Here are some example questions we’ve recently been asked by clients, which can help you better understand what is and isn’t qualified for the super-deduction:

 

  • 1: We’re thinking about contributing some money to our pool space provider for a water heater, will this qualify for a super-deduction?
  • Unfortunately no, because it’s not your asset – it belongs to your supplier.

 

  • 2. I’m thinking of leasing a new van under contract hire, will this qualify for super-deduction?
  • Unfortunately no, because you need to own the asset. It doesn’t work for leased vehicles.

 

  • 3. We’re thinking of buying an eye-testing machine for around £12,000, will this qualify for the super-deduction?
  • Yes, this will allow you to claim a £15,600 allowance and save you £2,964 in corporation tax, so an extra £684 of tax saving.

 

How long do I have to claim it? 

To qualify for the super deduction, all purchases must be made between the 1st of April, 2021 and the 31st of March, 2023. If you’re thinking about investing in new equipment for your business in the near future, be sure to plan ahead to take full advantage of the increased allowance.

 

How much tax will it save me?

Like we said above, the super-deduction can save you up to 25p for every £1 spent. What does this mean in action? Let’s look at an example:

You buy a new van for £30,000 + VAT. With the usual tax allowances, your total tax savings would be £5,700.

But, since it’s a new asset purchased between the 1st of April, 2021 and the 31st of March, 2023, your van qualifies for the super-deduction and becomes the equivalent of you spending £39,000. The £9,000 uplift can be offset against your company’s tax bill, which would save you up to £7,410 in corporation tax, or £1,710 in additional tax savings!

 

Beware the new corporation tax rates trap

Starting on the 1st of April 2023, corporation tax rates are due to increase. If your company has profits greater than £250,000, you’ll have to pay tax at the new rate of 25%. In this case, you’d be better off waiting to make large new purchases until the new tax rates kick in. Here’s why:

Using the same example as above, you purchase a £30,000 + VAT van. With the super-deduction savings of 24.7%, you save £7,410. Under the new corporation tax rates, however, you’d save £7,500, or an additional £90.

 

How can I claim it?

The super-deduction will be included in your company’s tax return, so when you can claim it depends on when your accounting period ends. Either your corporation tax bill will be reduced by the savings, or you may be able to claim tax back at a later date.

The super-deduction is a great way to reduce your tax bill and free up some cash to reinvest back into your business. If you still have questions about what qualifies for these deductions or want to make sure you’re making the best decisions for your business, get in touch.