How does it work?
The 50% First Year Allowance or 50% FYA allows businesses to claim a tax deduction of 50%.
This is eligible on the cost of qualifying plant and machinery assets, that have been bought in the same year.
This means businesses can deduct half the cost of eligible assets from their taxable income. However, this purchase needs to be made in the same year. But, this tax relief can provide a significant tax break and improve cash flow.
The remaining 50% of the cost can be claimed through capital allowances over future years, as per the standard rules currently at 6% annually. Eligible assets for the 50% FYA are items that qualify for the special rate pool allowances only. These items will typically be integral features. For example, electrical systems, lighting systems, heating and powered ventilation systems, cold water systems, etc. It is especially useful if the annual investment allowance (AIA) has all been used.
When was 50% FYA introduced?
The 50% FYA was introduced on 1 April 2021 as a temporary measure. Introduced by the government to encourage businesses to invest in new plant and machinery, especially as this time was difficult economically for many. However, in the Spring Budget of 2023, there was a further announcement. It was announced that the availability of this allowance had been extended to March the 31st, 2026.
Who qualifies?
Like Full Expensing (FE), this tax relief is available to corporation taxpaying companies only. Please note, it is not available to partnerships, sole traders, or LLPs. But, it is worth noting that those types of businesses are eligible to benefit from Annual Investment Allowance (AIA).
Qualifying assets are items eligible for special rate pool allowances only. However, this is not available on second-hand equipment already included in a property purchase. Businesses should consult with a tax professional to determine their eligibility.
Examples of qualifying items
Items that could qualify:
- Lighting systems
- Heating systems, including boilers and radiators
- Air conditioning and air-cooling systems
Claiming FYAs can provide significant benefits for businesses
Increased cash flow:
Claiming FYAs allows businesses to receive a larger tax deduction in the year of purchase, improving their cash flow and enabling them to reinvest the money saved into their business.
Reduced tax liability:
By claiming FYAs, businesses can reduce their tax liability for the year of purchase, which can help to increase their overall profitability.
Encouraging investment:
The FYAs scheme encourages businesses to invest in qualifying assets that promote energy efficiency, emission reduction, and water conservation, which in turn can help to improve their sustainability and competitiveness.
An example of how 50% first year allowance work
A small business purchases qualifying machinery for £500,000 in the tax year 2022/23. They can claim FYAs of 50% of the cost, which equates to £250,000. This £250,000 is deducted from the business’s taxable profits in the year the expenditure is incurred, reducing their tax bill for that year.
Assuming that the annual investment allowance (AIA) has been used in full against other qualifying costs. Plus, without FYAs, the business would only be able to claim a writing-down allowance (WDA) of 6% of the cost of the qualifying machinery each year. This would equate to £30,000 in the first year. The remaining £470,000 would be carried forward to future years to claim further WDAs.
By claiming FYAs instead, the business can benefit from a significantly larger tax deduction in the year of purchase. Improving their cash flow and enabling them to reinvest the money saved into their business.
