2021 Budget Update

Treasury Chancellor Rishi Sunak has announced his 2021 Budget. Here is the summary of the key changes in the Budget:

The most significant changes announced in the 2021 Budget are detailed below:

Income tax Personal Allowance

The income tax Personal Allowance will increase from £12,500 to £12,570 in fiscal year 2021/22 and will be frozen to 2026.

The 20% basic rate band to increase from £37,500 to £37,700.

The Higher rate Threshold will increase marginally from £50,000 to £50,270.

The nil rate band for savings income will remain at £5,000.

Dividends

The tax free dividend allowance of £2,000 will remain at £2,000 from 6 April 2021. The dividend tax rates will remain at 7.5% for basic rate, 32.5% for higher rate and 38.1% for additional rate taxpayers.

National Insurance

The National Insurance threshold for employees will increase from £9,516 to £9,568 in 2021/22.

From 2021/22, Class 4 National Insurance will apply from £9,568 to £50,270 at 9% for the self employed and 12% for employees.

Directors Loans

The Section 455 tax on Directors’ loans will remain at 32.5%.

Corporation tax rates and bands

Corporation tax to remain at 19% to 31 March 2022. From 1 April 2023 corporation tax will increase to 25% for businesses with profits over £250,000.

The rate will remain at 19% for small businesses with profits under £50,000 and a marginal rate of tax will apply to businesses operating between the two thresholds.

Annual Investment Allowance

The Annual Investment Allowance for companies will continue at £1,000,000 to 31 December 2021. The allowance will reduce to £200,00 thereafter.

Losses

Limited companies and sole trader businesses making trading losses in 2020/21 and/or 2021/22 will be able to carry back the losses for up to three years to offset against taxable profits or net income in those years on a last in first out basis.

The loss carry back extension applies to a maximum of £2m for each company or business. The ability to carry back to the previous 12 months remains unlimited.

Companies will need to weigh up the respective benefits of claiming a tax refund now through loss carry back against profits at a rate of 19% or carrying forward losses in light of the proposed increase in the corporation tax rate to 25% in subsequent years.

Capital Gains tax

The annual exemption for capital gains tax will remain at £12,300.

The main rates of capital gains tax will continue at 10% basic rate and 20% for the higher rate with the exception of gains on residential property which are taxed at 18% and 28% respectively.

Capital gains on residential property to be declared and paid to HMRC within 30 days of completion.

Business Asset Disposal Relief (formerly Entrepreneurs’ Relief)

The annual lifetime allowance for Business Asset Disposal Relief remains at £1m.

VAT

The VAT registration threshold will remain at £85,000. The deregistration remains unchanged at £83,000.

The reduced VAT rate for hospitality businesses will remain at 5% to 30 September 2021. The VAT rate will increase to 12.5% till April 2022 before returning to 20%.

National Living Wage

The National Living Wage increased in April 2021 from £8.72 an hour to £8.91.

Property Taxes

The stamp duty holiday was extended to 30 June 2021 with the nil rate band applicable for properties up £500,000. This will reduce to £250,000 thereafter.

Changes to IR35 and Intermediary Rules

IR35 rules introduced to the private sector commencing from 6 April 2021.

Domestic Reverse Charge in the Construction Industry

Contractors in the construction industry are required to apply the domestic reverse charge for VAT from 1 March 2021. The change will impact VAT registered businesses in the construction industry. Contractors at the end of the chain will continue to bill VAT to their clients and will account for the VAT of their respective CIS subcontractors.

Pensions

The pensions lifetime allowance will remain at £1,073,100 in fiscal year 2021/22.

The annual pension allowance will remain at £40,000.

Individual Savings Accounts (ISA’s)

The ISA Allowance will remain at £20,000 which can be apportioned between cash and share ISA’s.

The annual subscription limit for junior ISAs will remain at £9,000 in 2021/22.

Savings allowance

The personal savings allowance of £1,000 for basic rate taxpayers and £500 for higher rate taxpayers will remain in line with prior year.

Support for Covid19

The Furlough Scheme has been extended to 30 September 2021. The 80% grant to continue to June with employers contributing 10% in July and 20% in August and September.

The Self employed Covid19 grant will be extended for two more tranches. Businesses can claim up to £7,500 per quarter. Anyone who filed their 2020 tax return before the budget is eligible.

Business rates

Retail, hospitality and leisure properties will continue to benefit from 100% business rates relief from 1 April 2021 to 30 June 2021. This will be followed by 66% business rates relief for the period from 1 July 2021 to 31 March 2022, capped at £2m per business.

Other items

There is a proposed increase in the contactless limit for payments up from £45 to 100 later this year. The daily limit on multiple payments will rise from £130 to £300.

Summary

In summary, there are no major surprises in the Budget with many of the rates and allowances remaining in line with prior year. The introduction of the new IR35 legislation from 6 April 2021 represents the biggest change for our clients. Contractors in the construction industry will need to be aware of the recent introduction of the domestic reverse charge for VAT.

Contractors who fall outside IR35 and self employed individuals are unlikely to see any significant changes in their tax liability in 2021/22.

Belsize Accountancy are specialist accountants for contractors and small businesses.