The Budget & SMEs (pt 2): Super Deduction, Corporation Tax & NICs
On Monday, we began to unpick the Chancellor’s latest Budget, which was unveiled last week. We zoomed in on the Furlough Scheme and the Self-Employment Income Support Scheme, along with the reduced VAT extension for the hospitality and tourism sectors. Today we’re going to take a more detailed look at the new 130% Super Deduction for buying plant and machinery, plus changes to Corporation Tax. We also have advice about Class 2 National Insurance Contributions for anyone who has entered into a ‘Time to Pay’ agreement with HMRC.
1. 130% Super Deduction
This a major tax break on purchases of plant & machinery (P&M). It is only available to incorporated businesses, such as limited companies. In essence it is a 130% first-year allowance deduction for expenditure on P&M that would normally qualify for a main rate writing-down allowance of 18%.
You can claim the deduction for expenditure incurred from 1st April 2021 up to 31st March 2023. Expenditure is deemed as ‘incurred’ as soon as there is an unconditional obligation to pay it.
What qualifies as P&M?
This is quite detailed and complex, so we strongly recommend you talk to your THP account manager. However, qualifying assets are those that normally attract the writing-down allowance of 18% or (historically) the 100% Annual Investment Allowance. Some examples include:
- New plant, machinery and equipment bought by an SME
- Electric cars, zero-emissions good vehicles and vehicle charging points
- Cars with CO2 emissions below 51g/m
Conversely, the following examples do not qualify for the 130% Super Deduction:
- Second-hand assets
- Expenditure incurred on P&M that will be leased out
- Long-life asset expenditure
- Expenditure incurred on an asset that attracts the special rate writing down allowance of 6%.
- Connected part transactions
If any of the above exceptions sound like gobbledegook to you, you won’t be alone. This is a complex tax deduction, so it’s essential you get professional advice.
That said, there are some things you should know now. Firstly, don’t buy any assets before 1st April this year – otherwise you could miss out the 130% Super Deduction. If you dispose of an asset before 31st March 2023, the disposal value will be increased by an extra 30% – which could increase your tax bill. If possible, dispose of such assets after this date.
THP can also offer advice on whether your tax year needs to be changed to make best use of the 130% Super Deduction. Likewise, if your business is not yet incorporated, we can help you decide whether setting up a company is worth it in order to take advantage of this tax break. Get in touch today for more help.
2. Changes to Corporation Tax
The Chancellor’s changes to Corporation Tax (CT) contained good news and bad news, depending on the size of your business. From an accounting point of view, CT also got a lot more complex.
In a nutshell, Corporation Tax will go up from 19% to 25% from 1st April 2023. However, the 25% rate will only apply to profits of £250,000 and over. If your business makes an annual profit of £50,000 or under, then the rate will remain at 19%.
Where things get complicated is for businesses that make profits of between £50,000 and £250,000. If this applies to your business, you will need to calculate the relevant marginal rate – the tapered rate of tax that applies to profits between these figures.
Currently, we don’t know exactly how the marginal rate will be set. However, it’s likely that companies will pay 19% on the first £50,000 profit and the marginal rate on the amount between £50,000 and £250,000. If this is that case, a company making a profit of £125,000 in the 2023/4 tax year will need to pay CT of £29,275. At the current 19%, this figure would be £23,750.
We will update you when we know for certain how the marginal rate relief works. However, if you are likely to make more than £50,000 in profit, be aware that you’ll need to prepare for the changes.
3. Class 2 National Insurance contributions
Because of the COVID-19 pandemic, many people have arranged ‘Time to Pay’ arrangements with HMRC, allowing them to pay their Income Tax bills in instalments.
If this applies to you, get in touch with HMRC to make sure that your first payment is allocated against your Class 2 NIC first. If you don’t, it may have a negative impact on any future claims for your state pension and various other benefits.
As always, if you have any queries, please talk to your THP account manager.
About Ben Locker
Ben Locker is a copywriter who specialises in business-to-business marketing, writing about everything from software and accountancy to construction and power tools. He co-founded the Professional Copywriters’ Network, the UK’s association for commercial writers, and is named in Direct Marketing Association research as ‘one of the copywriters who copywriters rate’.