Welcome to the March 2020 Budget newsletter from Chamberlains
So, we had the first Budget for a while – new Chancellor, new Government, but all overshadowed by the need for help to deal with the Coronavirus pandemic.
The economy is obviously not doing sufficiently well to pay for everything that’s been promised, but fortunately interest rates are currently low enough to allow borrowing to cover them. (But the loans will still have to be repaid eventually, and interest rates will inevitably rise in the meantime – they can’t fall much further!)
However, some people are callously saying that the real damage will be done by bankruptcies rather than deaths – and indeed there is likely to be lasting damage beyond the heartache of losing oved ones. The Chancellor announced a number of measures that he hopes will protect businesses until the economy recovers. He repeatedly made the point that the virus was something temporary and that we’d recover – so it was just a question of lasting until then.
Once again, there were a few dogs that didn’t bark. It had been widely thought that higher rate tax relief would have been withdrawn for pensions, but no – help was instead given to higher earners so that they could continue to get relief for longer. This was in response to the problems with NHS consultants who somehow paid a lot more tax if they worked more. Inheritance Tax was another area where reform had been expected but where nothing was done. Climate change also received very little attention. So what was there? Here’s a summary of some of the more interesting points…
There was extra spending promised for roads, rail, broadband and other infrastructure projects, as well as extra money for the NHS to help cope with the coronavirus epidemic. But what we were waiting to hear was where the extra money was going to come from? Had he found a “magic money tree”, or would tax and borrowing have to increase? It seems as though it’s mainly the latter. The Office of Budget Responsibility had already downgraded growth forecasts for the UK economy to just 1.1% before the global coronavirus pandemic, which may temporarily plunge the UK into recession.
STATUTORY SICK PAY (SSP) RELIEF
The Government are predicting that up to 20% of the workforce may be unable to work due to the virus at any one time. It had already been announced that employees would be entitled to SSP from day 1 not day 4. It was announced in the Budget that the Government will fully reimburse employers with fewer than 250 employees the SSP paid for the first 14 days of absence, equivalent to the self-isolation period. However, big deal! SSP is only £94.25 a week – which doesn’t go far towards the cost of living. Many employers will pay more than this if they can afford it, but it may be difficult, with other strains on the cashflow.
MORE RATES RELIEF FOR SMALL BUSINESSES
There has again been much lobbying from the small business sector to reduce business rates to enable traditional retailers in particular to compete with internet traders.
The Chancellor announced a long term review of the future of business rates, but in the meantime there are some very welcome measures to assist small businesses. The 100% business rates retail discount will be extended to the leisure and hospitality sectors where the rateable value is no more than £51,000. These are sectors that will be hard hit by the Coronavirus.
In addition, very small businesses who already pay no business rates at all will be able to claim a £3,000 cash grant.
PERSONAL ALLOWANCE AND HIGHER RATE LIMIT FROZEN
As we expected, the personal allowance for 2020/21 is frozen at £12,500, the same as in 2019/20. The higher rate tax threshold is also frozen at £50,000.
NO CHANGES TO INCOME TAX RATES
Also as expected, the basic rate of income tax and higher rate remain at 20% and 40% respectively, and the 45% additional rate continues to apply to income over £150,000.
There had again been rumours that the dividend rate might be increased, but dividends continue to be taxed at 7.5%, 32.5% and then 38.1%, depending upon whether the dividends fall into the basic rate band, higher rate band or the additional rate band. Thankfully, the first £2,000 of dividend income continues to be tax-free.
The annual ISA investment limit increased to £20,000 from 6 April 2017 and remains at that level for 2020/21. There will be a significant increase in the Junior ISA limit to £9,000 for 2020/21.
IR35 “OFF-PAYROLL” RULES TO GO AHEAD
Despite considerable opposition from businesses, the Government have decided to go ahead with the new rules for workers providing their services through personal service companies from 6 April 2020 to all but “small” businesses, generally known as contractors. This will represent a significant administrative burden on large and medium-sized businesses who will be required to decide whether the rules apply to payments to workers supplying their services through personal service companies.
If the new rules apply to the arrangements, then income tax and NIC will need to be deducted from payments to the personal service company. The new rules mean that the contractors will end up with significantly less in their pockets.
Employees and the self-employed will not pay national insurance contributions (NIC) on the first £9,500 of earnings from 2020/21, a significant increase from the £8,632 limit in 2019/20. Note that employers will be required to pay 13.8% on earnings over £169 per week, £8,788 per annum.
The employment allowance that can be set against employers NIC increases to £4,000 from 2020/21 but will not be available to employers with total employer’s NIC liabilities in excess of £100,000 p.a. This effectively reduces payroll costs by £1,000 for many small businesses – thank you, say we!
STATE BENEFITS INCREASED
Many State Benefits have been frozen, or increases limited, for a number of years. The Government have however decided to increase many State Benefits from 2020/21 including Child Benefit. The amount payable in respect of the oldest child has been increased to £21.05 and £13.95 for each subsequent child. However, if either of the parents has income in excess of £50,000 some of the Child Benefit will have to be repaid as a sort of tax charge. By the time they reach income of £60,000, the Benefit has disappeared.
CAPITAL GAINS ENTREPRENEURS’ RELIEF RESTRICTED
Since April 2011, CGT entrepreneurs’ relief had allowed certain business owners to pay just 10% tax on when they sell their businesses, up to £10m. There had been thoughts that it might be abolished – it favoured just a lucky few. However, the Chancellor just decided to reduce the £10m allowance back to the £1m that was the allowance back in 2008 when it was first introduced. The relief will therefore still benefit most small business owners, but it allowed the Chancellor to say that he was recovering a bit of tax from the wealthy.
COMPANY TAX RATE FROZEN AT 19%
As previously warned last year at the Election, the corporation tax rate is to remain at 19% for the time being. It had been scheduled to reduce to 17% from 1 April 2020 – so that’s effectively a more substantial recovery of tax (provided companies make a profit!)
STRUCTURES AND BUILDINGS ALLOWANCE INCREASED TO 3%
In the October 2018 Budget a new tax relief was introduced for the cost of construction or renovation of commercial buildings and structures. As announced in the Conservative Party manifesto the original 2% straight line allowance is to be increased to 3% from 1 April 2020 for companies, 6 April 2020 for unincorporated businesses. Not very interesting for most of us…
R&D TAX CREDIT CHANGES
The Conservative Party manifesto also included a promise to increase R&D expenditure relief for non-SMEs (ie. large businesses) from 12% to 13% and this was now confirmed. However, a cap was originally announced in the 2018 Budget and consulted on in 2019 to limit the amount of repayable R&D tax credit for SMEs to three times the company’s total PAYE and NIC payments for the period. This measure now seems likely to take effect from 1 April 2021.
So, it was a less interesting Budget for tax advisors than we expected, but many people are breathing a sigh of relief. There are perhaps more important things to worry about at the moment!