Super Deductions: how do they work?

Super deductions were one of the announcements in the Chancellor’s 2021 Budget, and could help businesses looking at buying assets in the near future.

 

But what do they mean to you, how do they work, and what counts as a super deduction?


What is a Super Deduction?

If you spend money on assets (think equipment, vans etc) you can claim capital allowances on these to reduce your tax.

The new Super Deduction is a capital allowance.

Previously you could deduct 100% off your profits before working out your tax as “first year allowances”.

With super deductions, you can instead deduct 130% off your profits!

For a limited company this is a saving of 25% tax instead of 19%.


How does it work?

For every £1 spent on eligible plant and machinery, your tax reduces by 25%

The amount you spend goes on your tax return at the end of your financial year, and automatically reduces your tax


What counts as a super deduction?

The following have been listed by HMRC as eligible assets, and only assets bought as new, not second hand:

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

Cars are not eligible for the super deduction, nor electric vehicles. But there are still some tax advantages for you and your company if you buy a new electric car.

Find out more here about electric cars and tax.


When does it apply?

For expenditure between 1 April 2021 and 31 March 2023 you can claim 130% capital allowances on eligible plant and machinery


Who can use super deductions?

This is only available for limited companies, not sole traders or partnerships.


What’s the difference between capital allowances and depreciation?

Capital allowances are entered on your tax return to reduce your taxable profits, and are set by Government

Depreciation is a calculation on your Profit and Loss account that shows how your assets depreciate in value over a period in time.

The tax office ignores depreciation when working out your tax, and uses capital allowances instead.

This is because you can use any depreciation rate and method, to your advantage.


What do I need to do now?

Consider when you’re going to purchase new assets or equipment.

Usually we suggest doing this before your year end, so that we can make the most of tax reliefs.

However, if your year end is 31 March 2021, it may be advantageous to wait til 1 April to make an equipment purchase.

Before making any purchase, check that the equipment you’re about to buy does count as a super deduction.

Seek tailored advice, as our blog is for general guidance only, and doesn’t take into account your personal situation.


Do get in touch for tailored guidance, and check out our 2021 Budget blog for info on other announcements.