The annual investment allowance enables firms to fully offset the cost of qualifying capital items of plant and machinery against taxable profits.
Since 1 January 2019, businesses have received faster tax relief for plant and machinery investments up to £1 million.
The move intends to stimulate business investment by further incentivising firms to invest in plant or machinery.
After two years, the temporary measure was due to close on 31 December 2020 and revert to £200,000 from 1 January 2021.
However, the latest one-year extension aims to boost confidence as companies look to weather the pandemic.
Financial Secretary Jesse Norman said:
“It is vital that we support business through the difficult months ahead. Extending the allowance’s £1m cap will give businesses the confidence they need to invest into next year.”
Jeremy Coker, Association of Tax Technicians president, added:
“The extension will be very welcome for businesses with higher levels of qualifying capital expenditure. However, for many businesses whose relevant annual expenditure is no more than £200,000, it will simply delay an unwelcome complication.
“The Government should consider amending the legislation, so the allowance does not produce counter-intuitive results for businesses with lower levels of expenditure.”