Budget 2021 – what’s the meaning of a super-deduction?

During his speech, the Chancellor had everyone scratching their heads over his announcement of a super-deduction for investment – how super would it be, what is meant by investments and who would qualify? Now the wait is over, with the release of some further details – although we have to wait for the Finance Bill to understand things fully.

The super-deduction

With effect from 1 April 2021, an enhanced capital allowance will be available for companies investing in new plant and machinery. The relief will provide a deduction of 130% of the expenditure on qualifying assets (generally those which would fall to be allocated to the main rate pool for capital allowance purposes) providing a reduction in the company’s tax liability of just under 25 pence in the pound (the saving being 19% of the 130% deduction).

Although assets which would fall to be added to the special rate pool (such as integral features, long-life assets and certain cars) will be excluded from this super‑deduction, they will benefit from a 50% first year allowance instead.

The super-deduction and the first year allowance are time limited, and will end on 31 March 2023.

So what am I missing?

Sounds good? Yes, but still some head scratching going on here. Why do the budget notes still mention the extension of the annual investment allowance’s temporary £1 million cap until the end of 2021 which was announced in November 2020?

Well, the devil is in the detail – the super-deduction applies only to companies, so all other businesses are left with the good old annual investment allowance.

One would question the differential here – is it simply down to tax rates? If the super‑deduction were to be applied to an unincorporated business being taxed at the higher rate of tax that would result in a benefit of 52 pence in the pound, while one being taxed at the additional rate would benefit at 58.5 pence in the pound.

Let’s just hope that the £1 million cap on the annual investment allowance is extended beyond 31 December 2021, to benefit those larger unincorporated businesses while the super-deduction in in place.

If you would like to discuss this in further detail, please get in touch with your usual contact or e-mail us at experts@tacs.co.uk.

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