In a highly anticipated Budget speech Rishi Sunak, the UK Chancellor, outlined his proposals to strengthen and support the fragile UK economy. Peter Webb, our Head of Tax Advisory, shares an analysis of the key tax changes announced, with thoughts on how this will impact the future landscape.
At this year’s Budget it was clear a careful balancing act was needed. Unsurprisingly, Mr Sunak unveiled a series of Covid support schemes and reliefs for the business economy, along with some detail about the inevitable tax rises which will be essential to help repay the enormous borrowing which the pandemic has demanded.
UK personal tax
- The personal allowance will increase to £12,570 for the 2021/22 UK tax year (from £12,500). The basic rate band will rise to £37,700 with the higher rate threshold climbing to £50,270.
- A freeze on Income Tax thresholds will come into force until 2025/26.
These moves are expected to bring 1.3 million more people into paying Income Tax, with a further 1 million paying tax at the higher rate. These two moves will be expected to cost taxpayers more than £8bn a year up to 2025/26.
- The Stamp Duty Land Tax “holiday” for England and Northern Ireland, extending the nil rate band to £500,000 (due to expire on 31 March 2021) will be extended to 30 June 2021.
- The allowance will then drop to £250,000 to 30 September 2021, before returning to the usual rate of £125,000.
- The lifetime allowance for pensions will remain at its current level of £1,073,100 until April 2026. Typically, the lifetime allowance increases at the rate of inflation per tax year.
- This freeze is expected to raise a total of £1bn for the Treasury.
- Generally speaking, if an individual’s pension fund is valued higher than the lifetime allowance, HMRC will tax the excess at 55% if the pension is taken as a lump sum or 25% if taken another way.
- The annual allowance for pension savings has also been frozen until April 2026.
Inheritance Tax and Capital Gains Tax
- Thresholds for Inheritance Tax, the Main Residence Nil-Rate Band of £175,000 and the Nil Rate Band of £325,000 will be frozen until 2025/2026.
- The annual Capital Gains Tax allowance of £12,300 will be frozen to 2025/26.
- These steps will together gather a further £1bn of revenue.
A note for expats
Non-UK resident individuals are now able to claim relief for gifting business assets (more commonly known as Gift Hold-Over Relief). This allowance allows the gain on any disposal of business assets to be deferred, with Capital Gains Tax not kicking in until the recipient sells or gifts the assets on.
As previously announced, changes to IR35, an anti-avoidance tax legislation which applies to workers off-payroll, are set to be introduced in the next tax year. This is meeting with a lot of resistance, given there are many businesses and individuals in this position. Further changes will also be made to improve the operation of the rules, including Targeted Anti-Avoidance Rules, to ensure that the definition of an intermediary cannot be exploited.
An extension to Covid support
- The existing furlough scheme will be extended to September. Further grants will be provided to self-employed people (including those newly self-employed). Universal credit (of an additional £20 per month) is also extended to September.
- The extension of these schemes is estimated to deliver a £20bn boost to struggling businesses.
UK taxation of companies
- UK corporation tax on large company profits of over £250,000 will rise from 19% to 25% in 2023.
- UK corporation tax on small company profits of less than £50,000 will remain at 19%.
- Companies with profits between £50,000 to £250,000 will be provided with marginal tax relief to assist with the gradual increase in the corporation tax rate between the small profits rate and the main rate.
- In line with approach taken with former rules, the small profits rate will not apply to close investment-holding companies. Those falling under this category will pay UK corporation tax at the main rate. This will impact companies that may hold UK residential properties that will meet the conditions of a close investment-holding company.
These changes will provide approximately £46bn of revenue over the next five years. Whilst this is a steeper tax hike than expected, Mr Sunak advised that the UK corporate tax ‘main rate’ will still be the lowest of the G7 economies.
- A ‘super deduction’ tax break for companies will be introduced. This will apply for investments into productivity enhancing plant and machinery assets, and will allow companies to deduct 130% of their investment from taxable income. In reality, this translates into a tax bill reduction of 25p for every £1 invested.
- There will also be a temporary extension of ‘carry back’ for trading losses. Typically trading losses can be carried back one year, but the proposal extends this to three years. A cap of £2m of losses for this tax year and last will apply for unincorporated businesses, (2021 and 2022 accounting periods for companies).
The UK Budget 2021
Click here for a detailed overview of the announcements
A final analysis
In summary, it’s clear that the Government has focused its Budget 2021 on helping revive the economy by providing additional support for struggling industries, such as the hospitality and tourism sector, and individuals impacted by the pandemic. However, this isn’t without cost. The UK tax burden is set to rise at its highest level since the 1960s to around 35% of GDP, mainly due to freezes in personal tax allowances and a tax hike on UK companies from 2023.
Interestingly, there’s been no mention of an overhaul of the arguably, outdated Inheritance Tax regime, or an increase in Capital Gains Tax rates to align them with the Income Tax system. There’s every likelihood that these areas could be the focus of future Budgets.
It is worth remembering too that the £65bn outlay in the next two years to improve employment, investment and recovery will then follow with £25bn a year of corporate tax and Income Tax rises. Clearly there is a very long way to go to start to pay back such enormous levels of support, and more will be needed in years to come.
If you have any questions regarding you own tax and financial planning following the Budget statement, please do get in touch.