22 January 2021 - Article

Annual Investment Allowance for the Self-Employed

If your customers are self-employed, they might need to take action to reduce this year’s tax bill alongside completing payment for last year.

January is an important month for the self-employed, whether trading in a partnership or on their own. As soon as the Christmas decorations come down, the self-assessment tax return for the year ended 5 April 2020 must be submitted, and perhaps more importantly a payment made for all money owed by 31 January.

Due to the impacts of Covid, in 2021, HMRC is open to proposals involving staged payments for self-assessment tax return payments
The Annual Investment Allowance has been extended over 2021
Capital equipment expenditure can be brought forward as the AIA benefit can span both tax years 20/21 and 21/22.
Equipment subject to hire purchase finance agreements qualifies for AIA in exactly the same way as equipment purchased outright

Fortunately this year, because of Covid, HMRC is open to proposals involving staged payments which will come as a big relief to many business owners. Whilst the focus in January is normally to ensure that tax issues are dealt with in respect of the last financial year, small business owners also need to give some thought to measures that might reduce their tax bill for the current financial year.

In November last year the Chancellor announced that the Annual Investment Allowance (AIA) would be set at £1 million for 2021, this marked a continuation of the allowance that was originally only put in place for 2019 and 2020. The AIA is the amount of money a business is able to spend on the purchase of capital equipment and claim the full tax allowance in the tax year in which the acquisition was completed. So, providing all assets bought are used for business purposes only, a piece of equipment costing £50,000 can be purchased in 2021 and qualify for AIA which will provide a ‘first year’ tax allowance of £20,000 for a business owner paying income tax at 40%.

The key, however, to making full use of the annual investment allowance is to allocate it between tax years. By way of example, as a partner or sole-trader the current tax year runs from 6 April 2020 to 5 April 2021, so splitting the calendar year allowance between the two tax years that fall in 2021 is necessary. In summary this means that there might be real benefit in using some of the AIA available for 2021 between 1 January and 5 April to reduce a tax bill for the current financial year, a strong reason to bring forward any proposed capital equipment expenditure to ensure delivery before the start of the new tax year.

The additional good news is that customers can acquire the equipment needed now, with the full benefits of the AIA available in February and March without the need for a large cash outlay. This is possible because equipment subject to hire purchase finance agreements qualify for AIA in exactly the same way as equipment purchased outright. In other words customers get the tax allowances this year but spread the cost of purchase over a number of years.

Disclaimer

BNP Paribas Leasing Solutions is not authorised to provide tax advice. You should consult an accountant in order to understand the tax consequences of any investment decision.

Andy Milsom, Head of Partner Training & Development at BNP Paribas Leasing Solutions

Andy is an experienced sales and finance professional with over 25 years’ experience in sales aid leasing. Andy is widely recognised as an expert in business finance and has in recent years focused his attention on developing partner sales teams develop an understanding of how businesses secure project financing. His training programme – Finance Unlocked – is a highly rated customisable course and is offered at no cost to partners.

If you’re interested in helping your sales team overcome finance-related hurdles during the selling cycle, please get in touch with Andy on 07966 114 243 or email here.

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