As government support for the economy approaches £300 billion, the chancellor’s second Budget speech walked a tightrope between supporting business and starting to plug the black hole in the public finances.
Rishi Sunak announced wide-ranging policies, from a freeze in many tax allowances to an extension of popular government job support schemes. Here are seven key points from the 2021 Budget and what they mean for your clients.
1. Businesses will have to pay some furlough wages from July 2021
Ahead of the Budget, Rishi Sunak said: “We’re using the full measure of our fiscal firepower to protect the jobs and livelihoods of the British people.”
In a surprise move, the chancellor announced he was extending the Coronavirus Job Retention Scheme (the “furlough” scheme) until September 2021.
However, while the scheme will continue covering the wages of furloughed workers at 80% (up to £2,500 a month) until the end of June, businesses will be asked to contribute for the subsequent three months.
Employers will have to pay 10% of wages in July and 20% in August and September. Clients with staff on furlough should therefore budget for these payments.
2. Allowance and exemption freezes are “stealth taxes” in disguise
The chancellor announced he was freezing three key tax allowances and exemptions until 2026:
- The Inheritance Tax (IHT) threshold will remain at £325,000 with the “residence nil-rate band” at £175,000.
- The pension Lifetime Allowance will remain at £1,073,100.
- The Capital Gains Tax (CGT) annual exemption will stay at £12,300.
The freeze in the Lifetime Allowance is particularly bad news for wealthier clients with significant pension savings. Anyone whose pension savings are above the Lifetime Allowance – or grow in value over the next few years to exceed this amount – could face a levy of up to 55% on lump sums taken from their pension pot.
According to policy costings released by the government, the freeze will net the Treasury £990 million by 2025/26.
As the value of assets such as house prices and investments increases over the next five years, the freezes on IHT thresholds and the CGT exemption will also see more people face a tax liability.
The government says the IHT freeze could raise £985 million while the CGT freeze could swell Treasury coffers by £65 million by 2025/26.
3. Self-employed support will be based on turnover
The chancellor confirmed the fourth Self-Employed Income Support Scheme (SEISS) grant for February, March, and April 2021 will cover 80% of monthly profits up to a maximum of £2,500 a month.
An additional 600,000 workers who became self-employed in the 2019/20 tax year, and have filed a 2019/20 tax return, will also be eligible for this grant.
A fifth grant, covering May, June and July 2021 will also be available.
- The grant will pay 80% of monthly profits up to £2,500 a month to self-employed workers whose turnover has fallen by 30% or more.
- The grant will pay 30% of monthly profits up to £2,500 a month to self-employed workers whose turnover has fallen by less than 30%.
The government will release more details of how this will work in practice nearer the time.
Any self-employed client who has seen their turnover fall by less than 30% can expect to receive a smaller grant later in 2021.
4. Tax threshold freezes could mean clients pay more tax
To avoid breaking election manifesto promises, the chancellor announced no rises to VAT, Income Tax, or National Insurance contributions.
However, he did confirm that the Personal Allowance – the amount of income an individual can earn tax-free – would be frozen at £12,570 until 2026. He also froze the threshold for paying higher-rate tax at £50,270 for the same period.
A freeze drags more people into paying Income Tax and will also push 1.6 million people into the higher tax bracket by 2024.
The Telegraph calculated that an individual earning more than £60,000 would pay an additional £1,706 in tax because of the freeze, compared to if these thresholds were to rise in line with the consumer prices index over the next five years.
5. Larger businesses should prepare to pay more tax…
While many commentators were expecting a range of tax hikes to pay for coronavirus support, a Corporation Tax rise was the only headline increase.
From April 2023, the Corporation Tax rate will rise by six points to 25%. The chancellor argued that the UK will still boast lower Corporation Tax rates than other G7 countries including Canada, Japan, the US, and Germany.
If your clients run a small business with profits of less than £50,000, they will benefit from a “small profits rate” of 19%. 1.4 million businesses will therefore be unaffected and pay the same Corporation Tax rate as they do presently.
There will be a taper for profits above £50,000, so the 25% Corporation Tax rate will only apply to businesses who make profits of £250,000 or more. Sunak says that just 1 in 10 companies will pay the full higher rate.
6. …but should also invest now
After announcing a significant increase in business tax, the chancellor then announced what he called the “biggest business tax cut in modern British history”.
A new “super-deduction” will run from 1 April 2021 to 31 March 2023. The deduction means that, when companies invest, they can reduce their tax bill by 130% of the cost of the investment.
Sunak gave the example of a firm currently spending £10 million on equipment. Under the current rules they benefit from a £2.6 million tax reduction but, under the super-deduction they would get a tax break worth £13 million.
7. Clients have until the end of September to buy a home and get a tax break
With a backlog of hundreds of thousands of property transactions, the chancellor avoided a cliff-edge scenario by extending the Stamp Duty holiday, in full, until 30 June 2021. This will cost the Exchequer an estimated £1 billion.
The Stamp Duty nil-rate band will then decrease to £250,000 until the end of September 2021. It will revert to its pre-holiday level of £125,000 from October 2021.
Clients therefore have until September 2021 to purchase a residential property and benefit from a tax break. If they can complete before 30 June 2021, they won’t pay Stamp Duty on the first £500,000.
Get in touch
If any aspects of the Budget affect you or your clients, we can help. If you have clients that would benefit from advice, or you’re interested in how you can work more closely with us, please get in touch. Email firstname.lastname@example.org or call 01454 416 653.
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation which is subject to change.