If you crunch the numbers, and decide that investing in new technology, a new van, or other equipment will make a positive difference to your bottom line profits, and in a reasonable time-frame, the next question to ask is – what difference will the initial purchase make to your tax bill?
As long as the asset you are buying qualifies, the maximum write off is provided by the Annual Investment Allowance (AIA). Currently, you would be allowed to write off 100% of your assets purchases up to a value of £200,000 against your taxable profits for the accounting year during which you make the investment.
Assets that are specifically excluded from the AIA are:
items you owned for another reason before you started using them in your business
items given to you or your business
Also, you cannot claim the AIA in a final period of trading.
This allowance is particularly useful for self-employed business owners who may be paying income tax at the higher 40% or 45% rates. A qualifying investment of £200,000 would reduce their self-employed income tax bill by a significant amount.
For example, a self-employed sole trader, James, with profits of £220,000 and investing in qualifying plant of £200,000 during 2017-18, would see their income tax bill reduce from £85,200 to £1,700.
In addition to the income tax savings, James’s graduated Class 4 NIC payment would also reduce, from £6,963.44 to just £1,213.44.
The AIA is a generous allowance and whilst it is inadvisable to let the tax tail wag the dog, if there is a strong indication that a proposed investment will make a difference to your business, then the tax incentive is a useful bonus.
Finally, as with all tax planning, taking a hard look at the figures prior to any firm commitment to invest is paramount. Please call if you are planning an acquisition in the near future – essential if you want to get your tax ducks all in a row.