Annual Investment Allowance (AIA) – Maximising tax relief

The chance to take advantage of the generous temporary uplift in the AIA annual limit of £1,000,000 is coming to an end when it is due to revert to £200,000 from 1 January 2022.

It is a perfect time to plan to capitalise on claiming 100% tax relief on qualifying purchases without getting caught by the pitfalls of an in-year AIA annual limit change, especially when there is a significant reduction.

In the accounting period that straddles the transition date, it is important that businesses are aware of their AIA limits, so qualifying purchases are made at the most beneficial time and tax relief is claimed at the earliest opportunity. For example, a limited company with a 31 March 2022 year end has 9 months of the accounting period that falls under the £1,000,000 AIA limit and 3 months that fall under the £200,000 AIA limit.

The first calculation is establishing overall cap on the AIA available for the accounting period, which is a follows:

£1,000,000 x 9/12 = £750,000 plus £200,000 x 3/12 = £50,000 totalling £800,000

The second calculation is establishing the cap on the AIA expenditure available on or after 1 January 2022 when the AIA annual limit has reduced, which is a follows:

£200,000 x 3/12 = £50,000

Therefore, it is important to note that, although the maximum AIA available for the accounting period is £800,000, the maximum available post 1 January 2022 is £50,000. Therefore, any significant capital expenditure expected to be incurred would benefit from 100% tax relief on up to £800,000 of qualifying purchases made in the first 9 months of the accounting period. Whereas, qualifying purchases made in the last 3 months, post 1 January 2022, 100% tax relief would only be available on £50,000, the remaining £750,000 would be subject to the usual writing down allowances.