Using the Annual Investment Allowance to bring down your bills

There’s a way you can bring down your taxable profits (or increase your losses for tax purposes) by up to £200,000 a year. It’s called the Annual Investment Allowance (AIA).

Annual Investment Allowance

The AIA can be used when your business buys in new assets, plant, machinery, IT equipment, and more to improve your company processes, increase your product range and service offering, or enhance your efficiency. These items need to be bought and owned by your company – leased equipment is not eligible for AIA.

You can deduct all of the cost of these items from your level of profit up to a maximum of £200,000 a year.

TWP tip – the £200,000 is plus VAT is you are VAT registered and including VAT if you’re not VAT registered.

Annual Investment Allowance – what can my business buy?

You can purchase…

  • equipment used by the business
  • machinery
  • “integral features” for your premises (like lifts, re-wiring, air conditioning, heating, and so on)
  • “fixtures” for your business premises (like new toilets, bathrooms, kitchens, and so on)
  • the alterations you need to make to your business premises to install new assets
  • what you have to pay to have your old plant or equipment taken apart.

However, you can’t use AIA for…

  • cars
  • anything that you owned before you started to use them in your business
  • anything that has been given to you or your business.

For items you can’t claim AIA, writing down allowances should be used – speak to your usual TWP Accounting contact partner for more.

Annual Investment Allowance – how to use it as a sole trader

Let’s say you had a great year and you made £175,000 in profits for tax year 2017/2018.

On that, you’d pay £64,550 in income tax, £5,915.24 in Class 4 National Insurance, and £148.20 in Class 2 National Insurance. That’s a total tax bill of £70,465.25.

However, if you’d spent £150,000 this year on items you can claim against AIA, that would reduce your income to £25,000. On this, you’d pay £4,215.24 in tax (£2,700 in income tax, £1,515.24 in Class 4 National Insurance, and £148.20 in Class 2 National Insurance).

By claiming AIA against your asset investments, your tax bill reduces from £70,465.25 to £4,215.24, a fall of £66,250.01.

Annual Investment Allowance – how to use it as a limited company

For limited companies, your AIA reduces the amount of corporation tax you pay.

On the same example as above, you’d pay 19% on £25,000 profit as opposed to 19% on £175,000 profit, a saving of £28,500.

But what if you’d lost £175,000 in the year when you made £150,000 worth of AIA-allowable investments? You could increase the size of your losses from £175,000 to £325,000. You would therefore not start paying corporation tax again until the profits in following years had gone past £325,000 in total.

You would therefore not be paying tax on the £150,000 worth of AIA you’d claimed, saving you £28,500 on future corporation tax payments.

Annual Investment Allowance – get help

The Annual Investment Allowance is a very useful tool for sole traders, partnerships, and limited companies.  To make sure that your company is benefitting as much as it can, please call us today on 01932 704 700 or email to talk to your usual contact partner.

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