Find out how Annual Investment Allowance (AIA) is changing from 31st December 2020.
AIA lets you deduct 100% of qualifying expenditure from your tax bill. It has been capped at £1,000,000 for the years 2019 and 2020. However, from 31st December 2020 the cap is being lowered to its previous level of £200,000.
During the transition period, the amount of AIA that can be claimed can be worked out using the folloing formula;
(y/12 x £1,000,000) + (z/12 x £200,000)
y is the months in the financial year before 31st December 2020, and z is the months after 31st December 2020.
There is one more thing to remember with this formula.
Any expenditure after the 31st December 2020 will only be allowed to be claimed towards the 2021 AIA cap.
For example, John’s Electronics has a financial year ending 31st March 2021.
This means that the company has 9 months in 2020 with AIA of £750,000, and 3 months in 2021 equaling £50,000, totaling £800,000.
John spends £500,000 in January 2021, thinking he can claim all of that in AIA. However, the AIA is locked to each year, so John Paulo can only claim £50,000 for 2021
If the money was spent in December 2020, the entire amount could have been claimed, as it is under the 2020 total of £800,000.
This means that if you are planning to make big purchases which qualify for AIA, it may be worth making sure they happen before the cap changes.