Welcome to the Budget 2021 newsletter from Chamberlains
But before that, I hope you’ve stayed well. The year is gradually looking better, although not all of us have managed to avoid the Virus. We’ve been able to continue working with some degree of normality, albeit not as efficiently as we’d like – apologies if we haven’t always managed to deal with things as promptly as you’d have liked. However, despite the best delaying tactics of some of our clients (not you, obviously!) we managed to get all but four tax returns done by the original January deadline and all done by the last-minute of extension of 28 February, thank goodness! But be warned – we shall chase more rigorously this year…
In the meantime, you may have noticed that we had a Budget last week. There were a few things to note, but the Chancellor delayed the harsher medicine for the future, and there was no mention of the widely mooted changes to pension allowances or capital gains tax. There was quite a bit about spending plans – some less generous than hoped for, others quite welcome (eg. extensions to the furlough scheme) and some just blatantly political. But I shall concentrate on taxes…
NO CHANGES TO INCOME TAX RATES AND PERSONAL ALLOWANCE FROZEN
Not very exciting? 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. Election pledge, so no surprises here.
The personal allowance and higher rate threshold have been increased in line with inflation to £12,570 and £50,270 respectively for 2021/22 (all the tax software people and planners had got these in place, so it was kind to leave them unchanged!), Perhaps a bit more excitingly, these thresholds will then be frozen until 2025/26, netting perhaps a lovely £19 billion for the government, depending on inflation and increases in income.
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. Note that the first £2,000 of dividend income continues to be tax-free.
NATIONAL INSURANCE RATES
The national insurance contribution (NIC) rates and bandings were announced 16 December 2020 to take effect from 6 April 2021.
Employees and the self-employed pay NICs after the first £9,570 of earnings for 2021/22, an increase of £1 a week. The employee contribution rate continues to be 12% up to the Upper Earnings limit £50,270, with the self-employed paying 9% on their profits up to the same level.
Employer contributions will apply to earnings over £170 per week, £8,840 per annum which is also a £1 a week increase.
5% VAT RATE FOR FOOD, ATTRACTIONS AND ACCOMMODATION EXTENDED
In order to continue to support businesses and jobs in the hospitality sector, the reduced 5% rate of VAT will continue to apply to supplies of food and non-alcoholic drinks from restaurants, pubs, bars, cafés and similar premises across the UK until 30 September 2021.
The 5% reduced rate of VAT will also continue to apply to supplies of accommodation and admission to attractions across the UK.
From 1 October until 31 March 2022 the rate will be set at 12.5% and will then revert to 20% from 1 April 2022.
SURPRISE – CORPORATION TAX RATES TO INCREASE TO 25%
The UK corporation tax rate is currently one of the lowest rates of the G20 countries and the government states it is committed to keeping the rate competitive. Theoretically, that should encourage companies to remain in the UK and companies to set up here. Other countries are apparently considering raising corporate tax rates, so the increase from the current 19% to 25% from April 2023 doesn’t seem too outlandish. This 25% applies to all companies where profits exceed £250,000 and will taper toward the 25% from profits over £50,000.
Inevitably, it’s not quite that simple. If you have more than one company, these limits are divided by the number of companies – so that escape route is blocked. Also, Close Investment Companies (CICs) pay 25% on any level of profits. What’s a CIC? Roughly speaking, it’s a company owned by 5 or fewer people and which isn’t trading or investing in rental properties (so buy-to-let companies aren’t affected).
This extra tax charge may make the “dividends-instead-of-salary” route less attractive for owner-managed businesses – we’ll need to look at detailed calculations nearer the time.
SUPER-DEDUCTION FOR INVESTMENT IN NEW EQUIPMENT
In order to encourage companies to invest in new capital equipment the chancellor announced a radical new “super-deduction” of 130% where they invest in new plant. This would mean that when a company buys plant costing £10,000 they would qualify for a £13,000 deduction in arriving at business profits. The new deduction, which will run for two years from 1 April 2021 (ie. until the new 25% tax rate starts), will not be available for motor cars. Certain assets such as fixtures in buildings will qualify for 50% relief in the first year instead of their normal 6% writing down allowance.
THREE YEAR CARRY BACK OF TRADING LOSSES
Many businesses will have made a loss in the last year as a result of the Coronavirus pandemic and the difficult trading environment. Trading losses can normally only be set against profits of the preceding accounting period or previous tax year in the case of unincorporated businesses.
However, the carry back period has been temporarily increased to three years so that businesses have more chance of getting a tax refund. For companies this will apply to loss making accounting periods ending in the period 1 April 2020 to 31 March 2022. For unincorporated traders, the extended loss relief will apply to losses incurred in 2020/21 and 2021/22.
VAT REGISTRATION LIMIT FROZEN AT £85,000 UNTIL 1 APRIL 2024
The VAT registration limit normally goes up each year in line with inflation but will remain at £85,000 for a further two years. Assuming some level of inflation, this is another surreptitious tax increase, because more businesses will be brought into the VAT net..
MAKING TAX DIGITAL EXTENDED TO ALL VAT REGISTERED BUSINESSES FROM 1 APRIL 2022
The government has confirmed that the requirement to maintain accounting records in a digital format and submit the data to HMRC electronically will be extended to all VAT registered businesses from 1 April 2022 regardless of the level of taxable supplies. This will be a pain for smaller businesses who – horror of horrors! – still use hand-written records, and even spreadsheet-users will probably have to do things in a different way. Accounts software developers are rubbing their hands…
STAMP DUTY HOLIDAY SEASON CONTINUES
In order to stimulate the housing market, last March (yes, it’s been that long!) the Chancellor announced a temporary cut in Stamp Duty Land Tax for home buyers across England and Northern Ireland which was scheduled to last until 31 March 2021. This meant that there was no SDLT up to £500,000.
This has now been further extended until 30 June 2021 so that transactions in progress will continue to benefit from the reduced rates.
Then, as a transitional measure from 1 July 2021 this £500,000 (the “Nil Rate Band of Residential SDLT”) will then decrease to £250,000 for 3 months until 1 October 2021 when it will revert to £125,000 for purchases completed on or after that date. There has been no change to the SDLT rates above the Nil Rate Band. The 3% supplementary charge for second and subsequent homes in England and Northern Ireland will continue to apply.
NOT THE BUDGET, BUT TOPICAL: SPREADING DEFERRED VAT
If you were due to pay VAT between 20 March and 30 June 2020, you were able to defer this amount until 31 March 2021. This could lead to a painful reckoning at the end of this month – but you can apply to spread the amount if you join the new scheme. There are details here: https://www.gov.uk/guidance/deferral-of-vat-payments-due-to-coronavirus-covid-19
The default is to have monthly direct debits from March 2021 to January 2022 and it’s easy to apply – you pick the date each month and set up a new direct debit. I’ve just done it for Chamberlains in a couple of minutes! They say that we can’t do it for our clients – agents aren’t allowed to do it on behalf of their clients – but I’m sure we can find a way to help if you run into problems with it.