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The Super Deduction – A Way to Lower Your Corporation Tax

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tax preparation tips

Is there any way through which a nineteen percent stamp marked on the corporate income tax rate can be lowered?

Yes, businesses incorporated as limited companies can now benefit from a scheme that will help them reduce their tax obligations.

The super deduction was launched in the budget of 2021, applicable from 1st April 2021. Traditional sole traders and partnerships can not use it, as the super deduction applies to limited companies.

The HMRC has issued a complete sheet for their reasons for the super deduction. Needless to say, it is primarily to assist with post-COVID economic recovery.

The UK capital allowances regime is among the most competitive, yet this stabilizer will help limited companies more.

Super Deduction Guide

In this article, we provide an overview of the UK’s Super Deduction offering for limited companies.

What Does The Super Deduction Provide?

  • 130% first-year relief on qualifying main rate plant and machinery investments for companies who have invested in qualifying new rate plants
  • A 50% first-year allowance for qualifying particular assets
  • The relief will continue till 31st March 2023
  • Allow your company to save twenty-five pence in business taxation for every pound invested

What are qualifying main rate plant and machinery investments?

There is no exhaustive list, but the kinds of assets that may qualify for the super deduction include things that are not limited to computer equipment and servers including:

  • laptops and accessories
  • office equipment including desks, chairs, file holders, book racks, furniture
  • office vehicles including tractors, vans, lorries
  • electrical vehicle charge
  • refrigeration units
  • solar panels

The super deduction will endorse firms to invest in plant and machinery assets that will help limited companies to grow even when the conditions are not favourable.

There are different types of capital allowances on different types of investments, and these are provided in a much detailed handout provided by HMRC Treasury.

How much tax can you save on your investments?

Let’s use an example.


XYZ Limited – (An Example)

A limited company named XYZ limited purchased £10,000 of office and computer equipment include computers, photocopy machines, printers and much more. All types of hardware purchased can be used efficiently for five years.

XYZ limited made £50,000 of accounting profits in the year 2021. The gain is calculated after deducting £2000 of depreciation in the first year of ownership of the office.

The corporation tax bill will be £9,500 after applying the corporation tax rate of 19% on £50,000.

The £9,500 tax bill is a significant amount of taxation without implementing the super deduction magic!

The tax created on the asset is eligible for the application of the super deduction.

XYZ Limited gets the £10,000 spent on the equipment as a deductible capital allowance. Plus, it will also acquire an additional £3000 as part of the super deduction. The total capital allowance is £13,000.

Deductions for XYZ Limited:
  • £200 depreciation
  • £13,000 capital allowance deduction

For this example, after the £13,200 deductions, the £50,000 is reduced to £39,000, and when a corporate tax rate of 19% is applied, the tax liability is £7,410.

Before the Super Deduction, the corporation tax liability for XYZ was £9,500; however, after applying the deduction scheme, the tax liability was reduced by £2,090.

It’s worth noting here that if your limited company invests in a qualifying plant or equipment of more than £10,000, then 130% of this will provide your business with a more significant tax saving!

On average, the Super Deduction will provide twenty-five pence of corporation tax relief for every pound your company invests in a qualifying plant or machinery.

However, a word of caution – buy what your business needs. Avoid overzealous spending on plants and equipment to get additional tax relief.

Cash flow is king. Hold off spending thousands unless your business really needs the equipment. If in doubt, get professional input from your accountant and investment advisors.