The 50% First-Year Allowance is a tax relief which should encourage business to invest in new assets. It allows them to deduct 50% of the cost of eligible Capital Expenditure in the year they purchase it. This immediate reduction can reduce your Corporation Tax bill for that year and improve your cash flow.
The government introduced this allowance on the 1st April 2021 and extended it until 31st March 2026.
How Does the 50% First-Year Allowance Work?
When you buy qualifying Plant and Machinery, you can claim a tax deduction for half its cost right away. The remaining 50% goes into the Special Rate Pool and you claim it gradually though Writing Down Allowances, currently set at 6% each year. This allows you to recover costs faster than claiming only the standard annual writing-down allowance.
You must make claims in the year the expenditure occurred. You cannot claim both the First-Year Allowance and Full Expensing or the Annual Investment Allowance (AIA) on the same asset.
For example: If you spend £500,000 on qualifying assets during your accounting year, you can deduct £250,000 immediately from taxable profits. You then claim the rest over time. This can be useful if you are already using your AIA for other purchases.
What Assets Qualify?
The 50% First-Year Allowance only applies to Special Rate Pool assets, often integral features within buildings, such as:
- Electrical and lighting systems
- Heating systems, such as boilers and radiators
- Air conditioning and ventilation systems
- Cold water systems
- Lifts, escalators and moving walkways
These assets must be brand new and unused. Second-hand assets or those purchased as part of a property acquisition do not qualify.
50% First-Year Allowance vs Full Expensing
Full Expensing offers 100% deduction but applies only to main-rate assets such as most machinery and equipment. The 50% First-Year Allowance covers special rate assets, such as building-integrated systems.
Both are only available to businesses that pay Corporation Tax. Sole traders, partnerships and Limited Liability Partnerships (LLPs) cannot claim. However, they may still benefit from the AIA on qualifying assets.
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