Understanding the super-deduction for companies

To stimulate business investment as the economy recovers from the pandemic, the Chancellor introduced the 'super-deduction'. From 1 April 2021 until 31 March 2023, companies investing in qualifying new plant and machinery can claim a 130% first-year capital allowance.

This unprecedented tax break allows companies to cut their tax bill by up to 25p for every £1 they invest, making it the most attractive capital allowance regime in UK history.

How the super-deduction works

Normally, businesses claim the Annual Investment Allowance (AIA) to write off 100% of the cost of qualifying plant and machinery against their taxable profits. Under the super-deduction, a company spending £100,000 on qualifying equipment can deduct £130,000 from its taxable profits. At the current Corporation Tax rate of 19%, this generates a tax saving of £24,700, compared to £19,000 under the standard AIA.

Qualifying assets

The super-deduction applies to 'main pool' plant and machinery. This covers a wide range of assets, including computer equipment, servers, software, office furniture, commercial vehicles (like vans and tractors), and manufacturing equipment. Crucially, the asset must be brand new and unused. Second-hand assets do not qualify for the super-deduction, though they may still qualify for the standard AIA.

The 50% first-year allowance

For assets that fall into the 'special rate pool'—such as integral features of buildings (e.g., electrical systems, air conditioning) and long-life assets—the government has introduced a 50% first-year allowance. While not as generous as the 130% rate, it still allows companies to accelerate their tax relief significantly compared to the standard 6% writing-down allowance for special rate assets.