One of the few increases in tax allowances disclosed in the Budget last month was a doubling of the Annual Investment Allowance, from £50,000 to £100,000. This increase is effective from 6 April 2010 (income tax ) and 1 April 2010 (corporation tax).
The AIA is a capital allowance, an amount you can write off against taxable profits for purchases of qualifying plant and equipment; not cars.
What also slipped through, perhaps unnoticed, is the cessation of the 40% first year allowance (FYA) on the same date. During the tax year 2009-10 it was possible to claim a £50,000 AIA and a 40% FYA on any balance of qualifying expenditure over £50,000. So if you spent £200,000 your total write off against profits would be £110,000. (100% x £50,000, plus 40% x £150,000)
Taking into account the increase in the AIA and the 20% writing down allowance on expenditure in excess of £100,000, the actual break even mark is capital expenditure of £250,000. Any expenditure in excess of this amount will qualify for less overall capital allowances in 2010-11 as compared with allowances available in 2009-10.
Bonus for self-employed businesses.
Profitable self-employed business owners are facing an additional 50% income tax charge in 2010-11 on earnings in excess of £150,000. Judicious use of the AIA can have considerable benefits.
Lets consider a self-employed trader with taxable profits after all deductions, but before claims for capital allowances, of £250,000.
For 2010-11 the 50% income tax charge, not the total tax charge, would be £50,000. (£250,000 - £150,000 at 50%) If the trader spent £100,000 on qualifying plant or equipment, that qualified for the AIA, he or she could write off the £100,000 against the £250,000 profits and all of the 50% rate income tax charge would be eliminated! A tax saving of £50,000.
In cash terms that represents a 50% recovery of the £100,000 investment in the new plant or equipment.
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