Super Deduction
7 May

Super Deduction Tax Break: What is it and how does it work?

Super Deduction

At the Budget on 3 March 2021 new significant capital allowance measures were announced benefitting businesses with a generous tax break, whilst encouraging investment to help the economic recovery of the UK as we move out of the pandemic. Since the beginning of the pandemic, the already low levels of business investment have fallen, with a reduction of 11.6% between Q3 in 2019 and 2020. The introduction of the new capital allowance measures will give businesses a strong incentive to make additional investments, or bring pre-planned investments forward.

Here’s what on offer:

  • The super-deduction which offers 130% first-year relief on qualifying main rate plant and machinery investments until 31 March 2023 for companies.
  • The 50% first-year allowance (FYA) for special rate (including long life) assets until 31 March 2023 for companies.
  • Annual Investment Allowance (AIA) providing 100% relief for plant and machinery investments up to its highest ever £1 million threshold, until 31 December 2021.

Just a heads up…

Firstly, the changes are only available to companies subject to corporation tax. Not sole traders, partnerships or limited liability partnerships. That perhaps appears harsh for unincorporated businesses, but it is worth remembering that they will still benefit from the £1m 100% annual investment allowance which remains until at least 31 December 2021. This is expected to decrease to £200,000 from 01 January 2022.

These reliefs are also just for new, unused plant and machinery, not second-hand assets. So, they will not be available for property purchases, except new assets bought unused from a trading property developer. Furthermore, hire purchase spending is subject to restrictions.

In addition, the measures have a strict end date for expenditure incurred up to 31 March 2023. But in practice they have a floating start date because expenditure must be after 1 April 2021 and the contract must be entered into from 3 March 2023.

What are capital allowances anyway?

Capital allowances let taxpayers write off the cost of certain capital assets against taxable income. They take the place of accounting depreciation, which is not normally tax-deductible. Businesses deduct capital allowances when computing their taxable profits. This is easier to visualize with a numerical example. A company paying corporation tax that makes accounting profits of £900,000, has depreciation expenses of £300,000 and total capital allowance claims of £200,000, they would make the following adjustment:

  • Add £300,000 of depreciation expense to £900,000 accounting profits – £1,200,000
  • Deduct £200,000 of capital allowance claims = £1,000,000 (also known as taxable profits)
  • Apply the Corporation Tax rate of 19%: £1,000,000 x 19% = £190,000

Under the super-deduction, where your capital allowances are now deducted at 130% of the investment value. Following this new offer, the following adjustment would be made instead:

  • Add £300,000 of depreciation expense to £900,000 accounting profits = £1,200,000
  • Deduct £260,000 (£200,000 x 130%) of capital allowance claims = £940,000
  • Apply the Corporation Tax rate of 19%: £940,000 x 19% = £178,600

As you can see, using the super deduction gives an additional £11,400 saving in Corporation Tax, on top of the pre-existing relief you receive by utilising your annual investment allowance.

It should be noted, because first-year allowances are not pooled for capital allowances purposes, disposals of such assets will result in a balancing charge (declaration as immediate taxable income), rather than reducing the balance of the pool. Here, the intention of the draft legislation is that for disposals before 1 April 2023 the full 130% is clawed-back but for later disposals in a period straddling that date it tapers down to 100% by 31 March 2024.

What does capital expenditure look like to me?

A capital expenditure refers to funds spent on assets that provide use to a business for more than one accounting period, below are some of the main examples of capital expenditures for our clients:

  • Buildings
  • Computer Equipment
  • Office Equipment
  • Furniture and Fixtures
  • Machinery
  • Vans and commercial vehicles, excluding cars

Let’s have a look at the corporation tax relief you would receive on the purchase of a van for £25,000 with and without utilising the super deduction:

Without super deduction: You would be able to claim Annual Investment Allowance at 100% of the cost value of the van, and would therefore receive Corporation Tax relief at 19% of £25,000 = £4,750.

With super deduction: Under the new super deduction, you will receive relief on 130% of the cost value, so in this case, £32,500 (£25,000 x 130%) and the relief in terms of Corporation Tax will be 19% of this, £6,175.

Again here, there is a clear advantage in terms of the tax savings here, and is a prime opportunity for you to invest in your business to drive development and growth moving into the future.

Speak to the CMA Accountancy team today if you have any questions or queries as to how you can best benefit from the new capital allowance offers as we move towards financial recovery. If you would like to know more about the Accountancy Services we offer, then the easiest way to do it is to go to our website and take it from there!

If you’re still unsure about us, you can see our full testimonial page at testimonials

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