Tax Talk - Budget 2021

posted 03 Mar 2021 7 mins

After months of speculation, the chancellor delivered his budget on Wednesday, setting out support measures for the next stages of the pandemic and his plan for rebooting the economy.

Mr Sunak confirmed that the economy has shrunk by 10%, the worst contraction in 300 years and that borrowing, at £355bn, is at its highest level since World War II. While the chancellor acknowledged steps will be needed to rebalance public finances, his proposed countermeasures do not – to the relief of many – involve significant reform to personal and capital taxes at this point. However, the raft of consultations due to open on 23 March are expected to shed more light on the future of tax policy for individuals.

Here is a summary of the chancellor’s key announcements:

Personal Taxes

  • There will be no increase in the rate of income tax or national insurance contributions (NICs) for the upcoming tax year.
  • The personal allowance and higher-rate threshold for income tax will be increased in 2021/22 to £12,570 and £50,270 respectively; they will then be frozen until April 2026.
  • NICs thresholds will rise in line with the Consumer Price Index for 2021/22.  This equalises the upper earnings limit with the higher-rate threshold, which is frozen until April 2026.
  • For individuals investing in social enterprise, the Social Investment Tax Relief that was due to end in April 2021 has been extended to April 2023.
  • The lifetime allowance for pensions will also remain unchanged, at £1,073,100, until April 2026.
  •  Adult and child ISA annual subscription rates will remain unchanged, at £20,000 and £9,000 respectively, until April 2026.

Capital Taxes

  • The inheritance tax nil-rate band and residence nil-rate band (RNRB) will remain at £325,000 and £175,000 respectively until April 2026. The RNRB will continue to be tapered for estates exceeding £2 million.
  • The capital-gains-tax annual exempt amount will also be kept at the current level of £12,300 for individuals, and £6,150 for trusts, until April 2026.

Property Taxes

  • Due to the volume of transactions resulting from the Stamp Duty Land Tax (SDLT) holiday last year, many new purchases are not expected to complete by 31 March 2021.
  • The Chancellor has confirmed that the 0% SDLT threshold will remain at £500,000 until 30 June 2021. Thereafter it will be tapered: from 1 July 2021 to 30 September 2021, the 0% threshold will be reduced to £250,000 and from 1 October 2021 it will return to the pre-COVID threshold of £125,000. 

Business Taxes

  • From April 2023, the corporation tax rate on profits over £250,000 will rise to 25%. The rate will remain at 19% for small profits (under £50,000), with a tapered rate for profits between £50,000 and £250,000.  The government believes only 10% of companies will pay the higher rate and that 70% will be unaffected. The Diverted Profits tax will also rise to 31% from April 2023.
  • To support viable businesses forced into a loss-making position, the trading-loss ‘carry back’ rule will be extended from one year to three years. Unincorporated businesses and companies that are not members of a corporate group will be able to obtain relief for losses of up to £2m losses in each of 2020/21 and 2021/22. This could generate a maximum refund for businesses of £760,000.
  • While the UK will have a progressive tax regime in coming years, the chancellor, in hopes of an ‘investment-led’ recovery, is looking to encourage businesses to invest right now.
  • For the next two years, when companies invest in new equipment, they can claim a ‘super deduction’ of 130% of costs.  For example, under existing rules, a £10m investment by a business could reduce taxable income by £2.6m. Under the super-deduction scheme, the same business will be able to claim a deduction of £13m. The Office for Budget Responsibility (OBR) estimates this scheme could increase business investment by 10% and account for tax relief of up to £25bn over two years, providing a substantial boost to the economy.

VAT and indirect taxes

  • The 5% reduced rate of VAT for goods and services supplied by the tourism and hospitality sector has been extended to 30th September 2021.  There will then be an interim rate of 12.5% until April 2022. This will constitute a VAT cut of £5bn by next year.
  •  VAT registration and deregistration thresholds will not change for two years from 1 April 2022, providing much-needed certainty for businesses.
  • The planned increase in duties for spirits, wine, cider, and beer has been cancelled: alcohol duties will be frozen for second year in a row.
  • The planned increase in fuel duty has been cancelled.

Budget focus: COVID-19 recovery support

£65bn of further support was confirmed in the budget for 2020/21 and 2021/22, taking direct support in response to the pandemic to £352 bn.

Coronavirus Job Retention Scheme (CJRS)

  • The CJRS will be extended until the end of September 2021. Until July 2021, there will be no change to the scheme, with employees receiving 80% of their salary for hours not worked, funded by the government (employers need only cover NICs and pension contributions).
  •  From July until September 2021, businesses reopening will be required to contribute towards salary costs for hours not worked (10% in July and 20% in August and September).

Self-employment Income Support Scheme (SEISS)

  • The SEISS will also continue until September and will be made more widely available.  The fourth grant, covering February 2021 to May 2021, will be 80% of three months’ average trading profits (up to a maximum of £7,500).
  • The fifth and final grant, covering May 2021 to September 2021, will be 80% of three months’ average trading profits for those whose turnover has fallen by 30% or more. Anyone whose turnover has fallen by less than 30% will receive a 30% grant.
  • The newly self-employed did not previously qualify for the SEISS. However, the chancellor has confirmed that if the 2019/20 tax return is filed by midnight of 2nd March 2021, the fourth and fifth grants can be claimed.

Business support

  • From 6 April 2021, the Recovery Loan Scheme will provide lenders with a guarantee of 80% on eligible loans between £25,000 and £10m. The scheme will be open to all businesses.
  • Restart grants will be available up to £6,000 per premises for non-essential retail businesses and up to £18,000 per premises for hospitality, accommodation, leisure, personal care and gym businesses.
  • Last year, a 100% business rates holiday was given for leisure and retail. No business rates will be payable until June 2021. For the rest of the financial year, business rates will be discounted by two-thirds, capped at £2 million per business for properties required to close on 5 January 2021, or £105,000 per business for other eligible properties.   

Other measures and announcements

  • The Universal Credit uplift of an extra £20 a week will be extended for another six months.
  • The chancellor announced a £700m support package for arts, culture, and sporting institutions.
  • The government will introduce a new mortgage-guarantee scheme in April 2021. The scheme will provide a guarantee to lenders on mortgages for buyers with a deposit of just 5% on homes up to £600,000.
  • The OBR expects a swifter and more sustained recovery than was forecast in November. The economy is now forecast to return to pre-COVID levels by mid-2022 (six months earlier than previously expected).
  • The OBR also expects economic recovery to take time and forecasts that in five years’ time the economy will be 3% smaller than it would have been, had the pandemic not happened. The forecast is still for the economy to grow by 4% this year.
  • The OBR also said government interventions to support jobs have worked; it was expecting 11.9% unemployment in July 2021, but this figure has been revised to 6.5%.
  • In an innovative move, eight locations in the UK have been designated as freeports.  These areas will allow businesses to benefit from specific tax reliefs in order to incentivise investment and boost employment.

If you would like more detailed guidance on any of the issues raised in this update or to discuss your personal circumstances, please do not hesitate to get in touch with your Relationship Manager, or a member of the Tax team