The Budget follows a year of extraordinary economic challenge as a result of the ongoing COVID-19 pandemic. Like that of many other countries, the UK’s economy has been hit hard, with both the direct effects of the virus and the measures necessary to control it leading to an unprecedented fall in output and higher unemployment.
Summary of the main personal tax changes announced by the Chancellor:
Income tax: Five year personal tax ice age
The changes to tax bands announced for 2021/22 will continue in force up to and including 2025/26. The personal allowance for income tax will increase to £12,570 for 2021/22 - equivalent to £242 per week and £1,048 per month.
The basic rate band widened by 0.53% in 2021/22, rising from £37,500 to £37,700, where it will remain until 2025/26.
In Scotland, the starter rate will rise to £14,667 and the basic rate will increase to £25,296. The intermediate rate will also rise to £43,662.
The top rate threshold for England and all three devolved tax regimes will remain frozen at £150,000.
National Insurance contributions (NICs)
The same restraint on NIC bands will apply with the:
• upper earnings threshold aligned with the tax personal allowance at £12,570; and the upper earnings limit aligned with the basic rate band limit at £50,270.
Profit carry back period extended
• At present, an unincorporated business, such as a sole trader or partner in a partnership, can claim to offset losses against their net income of the current or previous year, or both years. For trading losses made in 2020/21 and 2021/22, you will be able to carry back for a period of three years, with losses being carried back against later years first.
Pension lifetime allowance frozen at 2020/21 level
No changes have been made to private pensions taxation, for the first time since 2004. Despite rumours that the Lifetime Allowance (LTA) would be cut from its current level of £1,073,100, the Chancellor has confirmed that it will remain unaltered until April 2026.
Inheritance tax thresholds held
The Chancellor confirmed that inheritance tax nil-rate bands will also stay at existing levels until April 2026:
• Residence nil-rate band will continue at £175,000
• Residence nil-rate band taper will continue to start at £2m
Capital gains tax
The value of gains a taxpayer can realise before paying CGT will remain as is until April 2026:
• £12,300 for individuals, personal representatives and some types of trusts
• £6,150 for most trusts
Corporation tax set to rise - but different rates for different size companies!
From 1 April 2023 corporation tax will increase to 25%, but companies with profits of up to £50,000 will pay tax at 19%, and a tapered rate will apply to profits up to £250,000.
Marginal relief for corporation tax, which many accountants bid a fond farewell to in 2015, is reintroduced and will apply where a company’s profits fall between £50,000 and £250,000.
The return to a small profits rate corporation tax regime adds unwelcome complexity. But there is one glimmer of good news for groups, as the £50,000 and £250,000 thresholds will be calculated based on the 51% related group company definition, rather than the previous (stricter) associated company rules. Some limited planning may therefore be possible.
Other company tax changes:
Many companies will have made losses during the Covid-19 pandemic, and additional relief is provided for loss-making business in the form of an extended three year carry back for up to £2m of losses per group in each of the financial years 2020/21 and 2021/22.
This £2m cap applies only to the extended carry back, ie there is no change to the unlimited carry back of losses to the previous 12 month accounting period.
Groups will be required to nominate a company to submit a loss allocation statement where any member of the group claims to carry back a loss of more than £200,000 under the extended carry back rules.
More detail of the group allocation is awaited, but the ability to make a loss carry back claim up to £200,000 without the administrative hassle of submitting a group allocation statement is helpful.
Further detail and examples of how the extended loss carry back provisions will operate are given in a policy paper.
New allowances for investments - super deuctions !!
A new “super deduction” of 130% of capital expenditure on new qualifying plant and machinery will apply from 1 April 2021 to 31 March 2023 (when the 25% rate of CT starts).
The 130% deduction applies to assets which would be eligible for the main pool capital allowances rate of 18%. Expenditure on new special rate pool assets will benefit from a 50% first year allowance. The super deduction is in addition to the extension of the AIA limit of £1m until 31 December 2021.
Businesses which are able to invest heavily in plant and machinery within the next two years will benefit from what Sunak billed as “the biggest business tax cut in modern British history” before the increased corporation tax rate of 25% kicks in.
There are exceptions to the expenditure attracting the new super deduction: plant and machinery must be acquired new, and expenditure on intangible assets is excluded.
Other thresholds and miscellaneous changes
• The 2021 Finance Bill will introduce a limited-time easement to the benefits in kind exemption for employer-provided bicycles.
• From 6 April 2021, the van benefit charge is reduced to zero for company vans that produce zero carbon emissions and which are available for an employee’s unrestricted private use.
• From 6 April 2021, the company van benefit which arises where a van is made available to an employee for private use will increase to £3,500.
• Gift holdover relief will not be available where a non-UK resident person disposes of an asset to a foreign-controlled company, controlled either by themselves or another non-UK resident with whom they are connected. This measure will apply to disposals made on or after 6 April 2021.
• The previous end date of the social investment tax relief of 6 April 2021 has been extended to 6 April 2023.
• This applies to investments in qualifying social enterprises and will allow income tax relief and capital gains tax holdover relief for investors to continue.