Your 2021 Budget summary

Published on March 4, 2021 by Nick Donohue - Head of Tax

On Wednesday 3 March, Rishi Sunak delivered his second Budget as Chancellor. The Budget outlines the state of the economy and the government’s spending plans.

The World Health Organization declared Covid-19 a pandemic on 11 March 2020, the same date as the 2020 Budget. Since then, the pandemic has led to lockdowns, restrictions and an enormous rise in government spending.

The Office for Budget Responsibility (OBR) estimates borrowing for the current tax year will be £394 billion, the highest figure seen outside of wartime. So, it’s no surprise that Covid-19 continues to influence decisions.

The Chancellor noted the economy has been damaged, with GDP shrinking by 10% in 2020, and that the road to recovery would be a long one. However, he added: “We will continue doing whatever it takes to support the British people and businesses through this moment of crisis.”

As usual, the Budget began with an overview of the economy.

The economic outlook

The OBR expects the economy to grow faster than previously forecast. The economy is now forecast to grow by 4% in the coming fiscal year, and then by 7.3% in 2022.

However, the Chancellor noted that the pandemic is still inflicting profound damage on the economy. The OBR predicts that, in five years, the economy will still be 3% smaller than it would have been otherwise.

The improved outlook also means peak unemployment is expected to fall. It’s now expected to reach 6.5%, compared to the initial forecast of 11%.

Covid-19 support measures

As expected, Covid-19 support has been extended to cover the spring and summer months.

The Coronavirus Job Retention Scheme, often known as the “furlough scheme”, will now run until the end of September. It will continue to provide 80% of wages (up to £2,500 per month) to workers unable to work due to the pandemic. From July, employers will need to contribute at least 10% of their furlough wages and 20% in both August and September.

Self-employment grants will also continue, with two further instalments over the coming months. The scheme has been extended to include the newly self-employed who missed out on previous grants and have now filed a tax return. Newly self-employed individuals must have filed their tax return by midnight on 2nd March 2021.

The Chancellor said total Covid-19 support measures are now worth more than £400 billion.

Other important announcements included:

  • Restart grants to help businesses reopen as lockdown restrictions lift. Retail firms can apply for up to £6,000 per premise, while hospitality businesses can receive up to £18,000.
  • Recovery loans will be available to provide businesses with a capital injection. The scheme will offer loans from £25,000 to £10 million until the end of the year, with the government guaranteeing 80% of the loan.
  • The business rate holiday for retail, leisure and hospitality firms has been extended for a further three months until the end of June. There will then be a six-month period where rates will be two-thirds of the normal charge.
  • The reduced VAT rate of 5% for the hospitality industry will remain in place until the end of September. There will then be an interim 12.5% VAT rate until April 2021.

A number of measures had previously been made public so there was little surprise when they were announced.

Personal finance

Income tax rates will stay the same with the basic rate remaining at 20%, the higher rate at 40% and upper rate at 45%.

The Personal Allowance – the threshold before you need to pay Income Tax – will increase from £12,500 to £12,570 as planned in the 2021/22 tax year. The threshold for higher-rate taxpayers will also rise from £50,000 to £50,270 in 2021/22.

However, both these thresholds will then be frozen until 2026. So, while you may not face an immediate tax rise, the freeze will affect income in real terms over the next few years as wages raise in line with inflation more people will find themselves paying tax as income rise above £12,570 and also more taxpayers will become higher rate payers.

The Chancellor also announced that several other allowances will freeze, rather than rising in line with inflation:

  • The pension Lifetime Allowance will remain at £1,073,100 until at least April 2026
  • The Capital Gains Tax annual exemption will remain at £12,300 until at least April 2026
  • The Inheritance Tax nil-rate band (£325,000) and residence nil-rate band (£175,000) will again remain frozen until at least April 2026.

These freezes could affect personal finances in the long term as the value of assets increase, potentially making more people liable to capital gains tax, and also more estates into the inheritance tax net.

Companies

The headline announcement for companies is the rise in Corporation Tax.

From April 2023, Corporation Tax paid on company profits, will rise from 19% to 25%. However, small businesses with profits of less than £50,000 will continue to pay the current 19% rate and there will be a taper for companies whose profits are between £50,000 and £250,000. The introduction of two rates of Corporation Tax means that the number of associated companies will become relevant when calculating the rate of tax a company pays.

It was announced that only businesses with profits of more than £250,000, around 10% of firms, will pay Corporation Tax at 25%. However, carved out from the £250,000 profit threshold are Close Investment Holding Companies; these companies will pay Corporation Tax at 25% irrespective of their level of profits. Family Investment Companies are likely to be classed as Close Investment Holding Companies so a review of the assets held by these companies may be recommended. Income generating assets may still be better held in a company but capital appreciating assets may be better held personally as the rate of capital gains tax will be lower than the increased Corporation Tax rate.

To counter the increase in Corporation Tax, a new “Super Deduction” will allow companies to reduce their tax bill when they invest in qualifying plant and machinery.  From 1st April 2021 until 31 March 2023, businesses can reduce their tax bill by 130% of the cost of investment in a bid to encourage firms to invest for growth. It’s a move that hasn’t been tried before, but the OBR predicts it could boost investment by 10%. The super deductions will be available on qualifying plant and machinery that falls into the main capital allowance pool. Assets that normally qualify for a reduced rate of capital allowances will benefit from a 50% first year allowance. Only assets acquired post 1 April 2021 will qualify.  It may therefore be worth delaying the purchase of any qualifying asset that was intended this month.

Tax Losses

The Chancellor also announced an extension to the period that tax losses can be carried back against profits arising in prior years. This is a temporary measure and applies to accounting periods ending 1 April 2020 to 31 March 2022 for companies and in the tax years 2020 to 2021 and 2021 to 2022 for unincorporated businesses.

Currently, losses can be carried back 12 months but today’s announcement extended this to 3 years. This may provide a welcome cash boost for any business that has paid tax in the past 3 years, which is currently making losses.

For companies, losses must be carried back against later year’s profits first. The amount of loss that can be carried back is unrestricted for the first 12 months but is capped at £2m for losses carried back either 2 or 3 years. Losses can only be carried back against profits arising from the same trade.

For individuals, the number of trading losses carried back against trading profits of the preceding year will remain unlimited. A separate £2,000,000 cap will apply to the extended carryback of losses carried back beyond the preceding year.

Other announcements

Apprenticeships

Businesses can also take advantage of the government’s drive to encourage apprenticeships and traineeships. Incentive payments for firms hiring apprentices will double to £3,000. The Chancellor also revealed he is launching a programme to help firms develop digital skills.

Housing

The Chancellor announced two key measures for the property sector.

First, the Stamp Duty holiday will be extended by six months. Until the end of June, homebuyers purchasing a property worth up to £500,000 will not have to pay Stamp Duty. The threshold will then fall to £250,000 until the end of September. From October, the threshold will be £125,000.

Second, the government will provide mortgage guarantees to lenders offering 95% mortgages. The move aims to support first-time buyers with small deposits. These mortgage products will be available from April.

Culture

Cultural venues have been significantly affected by Covid-19. The Budget revealed a new £300 million “Culture Recovery Fund” to support arts, culture, and heritage industries.

In addition to this, a £150 million fund has been set up to help communities take ownership of pubs, theatres, and sports clubs that are at risk of closure.

Fuel and alcohol duty

Despite plans to increase fuel and alcohol duty, both have been frozen. The freeze means fuel duty will not rise for the 11th year in a row, while alcohol duty has not increased for two.

Infrastructure

A new “Infrastructure Bank” will launch this spring, with around £12 billion in initial funding and will be located in Leeds. It will invest in both public and private sector green projects across the UK.

It’s expected the bank will support at least £40 billion of total investment in infrastructure.

If you have any questions on any of yesterday’s announcements please contact either Nick Donohue or your usual RPG contact.

Nick’s experience covers all major areas of taxation and during 2020 /21 Nick has led RPG’s response to the Covid-19 pandemic with interpretation and follow up of the various support packages provided by the Chancellor of the Exchequer, during what has been a very stressful time for many clients. Nick has also been instrumental in guiding clients through the conclusion of the UK’s Brexit deal, advising clients on the general tax and VAT implications of the final deal. Contact: NDonohue@rpg.co.uk

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