Budget 2021 – key highlights
Mar 10, 2021
Budget & Autumn Statement
The Chancellor presented his Budget on 3 March 2021, stating that it was the government’s intention to protect jobs and strengthen public finances in the face of ongoing pressures caused by Covid-19. As well as further help with the furlough scheme and the self-employed grant scheme, the Chancellor outlined the following measures.
The basic rate of income tax allowance will increase to £12,570 in April 2021, from its current level of £12,500. It will then be frozen at £12,570 from 2022 until 2026.
Higher rate income tax is increasing to £50,270 in April from its current level of £50,000. This threshold will then be frozen until 2026.
There had been rumours that the dividend rate might be increased, but dividends continue to be taxed at 7.5%, 32.5% and then 38.1%, depending upon whether the dividends fall into the basic rate band, higher rate band or the additional rate band. Note that the first £2,000 of dividend income continues to be tax-free.
National insurance rates
The national insurance contribution (NIC) rates and bandings were announced on 16 December 2020, to take effect from 6 April 2021. Employees and the self-employed will not pay NICs on the first £9,570 of earnings for 2021/22, an increase of £1 a week. The employee contribution rate continues to be 12% up to the Upper Earnings limit of £50,270, with the self-employed paying 9% on their profits up to the same level. Note that employer contributions will apply to earnings over £170 per week or £8,840 per annum, which is also a £1 a week increase.
Corporation tax on company profits will rise from 19% to 25% in April 2023. Those businesses with profits of £50,000 or less, which equates to around 70% of actively trading companies, will continue to be taxed at 19%. A tapered rate will also be introduced for profits above £50,000, so that only businesses with profits of £250,000 or greater will be taxed at the full 25% rate. Those in the band between £50,000 and £250,000 will be at a tapered rate.
Three year carry back of trading losses
Many businesses will have made a loss in the last year as a result of the Coronavirus pandemic and the difficult trading environment. Trading losses can normally only be set against profits of the preceding accounting period or previous tax year in the case of unincorporated businesses.
The Chancellor has announced that the carry back period will be temporarily increased to three years, thereby enabling the business to obtain a tax refund. For companies this will apply to loss making accounting periods ending in the period 1 April 2020 to 31 March 2022. For unincorporated traders, the extended loss relief will apply to losses incurred in 2020/21 and 2021/22.
The amount of trading losses that can be carried back to the preceding year remains unlimited for companies. After carry back to the preceding year, a maximum of £2,000,000 of unused losses will then be available for carry back against profits of the same trade of the previous 2 years. There will be a similar £2,000,000 limit for unincorporated businesses.
Business rates holiday
The business rates holiday which was announced last year for those businesses in the hospitality and leisure sectors has been extended by an additional three months until the end of June. Then for the remaining nine months of this tax year, business rates will be discounted by up to two thirds. This will be capped at £2m for businesses which have remained closed, while a lower cap will apply to those businesses in the hospitality and leisure sectors which have managed to stay open during the pandemic.
VAT for tourism and hospitality
The rate of VAT which businesses in the pub, restaurant and hospitality industries have to pay was dropped from 20% to 5% last year, as part of the government’s pandemic support measures. However that rate reduction was only temporary, and was initially due to expire at the end of January. It was then extended to the end of March, and has now been pushed back for a further six months, so businesses will pay just 5% until the end of September. After this, to help businesses manage the transition back to the standard rate, a 12.5% rate will then apply for a further six months, until 31 March 2022.
Super Deduction tax break
The Chancellor also announced a ‘super deduction’ tax break, for companies which invest in new equipment from the start of April 2021. This tax break will cut companies’ tax bill by 25p for every pound they invest in qualifying plant and machinery, meaning they can reduce their taxable profits by 130% of the cost. This is worth £25 billion to companies over the two-year period the super-deduction will be in full effect. To put it in more simple terms – if you spend £100,000 on equipment for your small business, the corporation tax deduction will be £130,000, giving corporation tax relief at 19% on £130,000, which is £24,700.
Help to Grow
A new Help to Grow scheme has been announced, worth £520m and aimed at supporting small businesses in boosting their productivity. A digital version will provide small businesses with free online technology advice, and 50% discounts on approved software. The management option is intended to provide SME business leaders with subsidised training, covering areas like marketing and financial management.
High street shops and hospitality businesses will be eligible for a new £5bn restart grant scheme to help them get up and running again. The scheme will provide up to £18,000 (depending on rateable value) for leisure and hospitality businesses, including accommodation, personal care and gyms. Non-essential retail, which is allowed to open earlier, will be entitled of grants of up to £6,000.
The grants will be administered by local councils, who will also receive a further £425 million to distribute grants to businesses which are not eligible for the restart grants but which are still suffering because of Covid restrictions.
The Restart Grant scheme will replace the monthly Local Restrictions Support Grant (Closed) and Local Restrictions Support Grant (Open), which will both close at the end of March.
Recovery loan scheme
A new recovery loan scheme is being launched by the government to replace existing guaranteed schemes such as the bounce back loan, which will all close at the end of March 2021. The recovery loans are open to businesses of any size, and they run from £25,000 up to £10 million. The government will provide a guarantee worth up to 80% to lenders offering the loans. The recovery loan scheme is scheduled to run until 31 December 2021, but this is subject to review.
Further tax consultations to follow
Rishi Sunak had to choose a fine line between raising taxes to start paying down the government’s massive borrowings and at the same time stimulating the economic recovery and saving jobs. Pledges made in the Conservative Party manifesto meant he couldn’t raise income tax, VAT or national insurance, so that leaves corporation tax, capital gains tax and inheritance tax. It has been announced that there will be important consultation documents issued on 23 March 2021 which will seek views on future tax changes. This may be when the expected reforms to CGT and IHT will be announced.
Alternatively the Chancellor may delay the announcement of significant increases in taxation until later in the year, as it is anticipated that there will be a further Budget in the autumn. By then the economy will hopefully have started to bounce back.
The Treasury has confirmed that the government will also publish an interim report on its review of business rates on 23 March, as well as the consultation responses it has received. The final report will not be published until the autumn.
If you have any queries about impact of the announcements made in the Budget, then please contact us and we’ll be happy to discuss these with you.