I’ve posted a couple of times on this blog about why now is a good time to invest. I personally am reinvesting most of my profits until we are out of the recession, the idea being I will be in a good position when the economy picks up. A strategy I highly recommend if you have the money right now.
Daily I read business forums, newspapers etc and generally try to keep track of financials that affect me. But one that completely bypassed me was the AIA, or Annual Investment Allowance. I’m not great at accounting but I know the basics that I need to at this moment in my business life.
What Is The AIA
Previously in your capital allowances you could claim 40% or 50% off the cost of major investments (computer equipment, machinery etc). Now, upto a limit of £50,000, you can claim 100% of investments! After that the rate is 25%, so for big businesses reinvesting a lot more than this it will harm them, but for small businesses it is brilliant. You can read more on accountingweb.co.uk.
The Maths
Here is a breakdown comparing how much taxe you would have paid previously (based on claiming 50% of investments) with the new AIA.
I’ve kept the figures nice and simple so it should be easy and clear to understand.
Previous Scheme:
Business Revenue – £100,000
Cost Of Sales – £60,000
Profit – £40,000
Reinvested £20,000 of that profit in new assets
Capital Allowance – 50% of the £20,000 (so £10,000 tax deductible)
Meaning you will be taxed on a figure of £30,000 – you would pay £7495.15 in tax deductions*.
New Scheme:
Business Revenue – £100,000
Cost Of Sales – £60,000
Profit – £40,000
Reinvested £20,000 of that profit in new assets
Capital Allowance – 100% of the £20,000 (so £20,000 tax deductible)
Meaning you will be taxed on £20,000 – you would pay £4395.15 in tax deductions*.
The difference in the amount of tax you would have to pay is £3,100!
Personally this tax doesn’t make any difference in terms of my decision to reinvest, because my strategy is based on the state of the economy, not the taxman. But this is a major bonus and means this year I have to pay a couple of thousands of pounds less tax then I expected!
So if you are in a position to then I highly recommend you get investing in new websites/domains etc for when we come out of the recession. The AIA makes it even more worthwhile. Of course, you should still make good decisions and not just invest to lower your tax bill!
*I used listentotaxman.com to get the tax deductions figures, based on 08/09 rates.
2 Comments Posted
Wow this is a great resource.. I’m enjoying it.. good article
These chnage form time to time and always ask you acountant before the year end to see what scop there is for taking advantage of any unused allowances.
Add Your Comment To This Page!