Investment incentives

One of the few increases in tax allowances disclosed in the Budget last month was a doubling of the Annual Investment Allowance (AIA), from £50,000 to £100,000. This increase is effective from 6 April 2010 (income tax ) and 1 April 2010 (corporation tax). The AIA is a capital allowance, an amount you can write off against taxable profits for purchases of qualifying plant and equipment; not cars.

Profitable self-employed business owners are facing a 50% income tax charge in 2010-11 on earnings in excess of £150,000 and a marginal tax rate of 60% on income between £100,000 and £112,950.

Judicious use of the AIA can have considerable benefits. Let’s consider a self-employed trader with taxable profits after all deductions, but before claims for capital allowances, of £250,000. For 2010-11 the 50% income tax charge, not the total tax charge, would be £50,000. (£250,000 - £150,000 at 50%) If the trader spent £100,000 on qualifying plant or equipment, that qualified for the AIA, he or she could write off the £100,000 against the £250,000 profits and all of the 50% rate income tax charge would be eliminated! A tax saving of £50,000.

It is interesting to note that the budget contains this incentive to invest. It may have encouraged some delayed capital expenditure to save 50% rather than 40% tax.