Budget Summary Spring 2021

National Insurance Contributions

Thresholds and rates (Table D)

There have been small increases in the thresholds above which employer’s and employee’s National Insurance Contributions become payable. The upper limits for employee contributions remain aligned with the point at which 40% Income Tax is payable (£50,270 per year, or £967 per week).

The upper limit will be frozen, in common with the personal allowance and basic rate band, until the end of 2025/26. Raising the upper limit increases the amount of NIC payable – salary below that level is charged at 12%, but above that level it is charged at 2%. The Budget documents state that decisions will be taken each year on the lower threshold, which is not being fixed in advance.

Savings and Pensions

ISA limits

The investment limits for 2021/22 remain £20,000 for a standard adult ISA (within which £4,000 may be in a Lifetime ISA), and £9,000 for a Junior ISA or Child Trust Fund.

Pension contributions (Table B)

There has been speculation that the Chancellor might reduce pension tax relief, which costs the Exchequer a great deal. There were no significant announcements of reform in the Budget, although a number of consultations are expected on 23 March that might deal with this. The only measure announced related to the Lifetime Allowance (LA), which is the maximum amount that a person can save in tax-advantaged pension schemes before extra tax charges arise on drawing benefits. The value of benefits is measured against the LA when benefits are first taken from a pension, and on some other occasions, including the individual’s 75th birthday. The LA is frozen at its 2020/21 level of £1,073,100 until the end of 2025/26. When LA was first introduced in 2006, it was £1,800,000; fixing it at this level will mean that many more people will have to consider the tax charges when they draw their pensions over the next few years.

Capital Gains Tax

Rates and annual exempt amount

CGT is not subject to the Conservative manifesto pledge not to increase the rates of Income Tax, National Insurance Contributions or VAT, which has contributed to speculation that CGT rates might be increased, possibly aligning them with Income Tax. No such announcement was made in the Budget, but a number of consultations to be issued on 23 March may cover this. Any change is unlikely to be introduced before the end of 2021/22, because the documents issued with the Budget show no changes to CGT rates.

The annual exempt amount will be fixed at its 2020/21 level of £12,300 until the end of 2025/26.

Inheritance Tax

Rates

The IHT nil rate band was increased to £325,000 on 6 April 2009, and previous Budgets had fixed it at that level until the end of 2020/21. This Budget has further fixed it until the end of 2025/26. Holding the threshold at the same amount for 17 years will bring far more people into the scope of the tax. However, the introduction of the ‘residential nil rate band enhancement’ on death transfers can reduce the impact where it applies. From 6 April 2020, a married couple are able to leave up to £1 million free of IHT to their direct descendants (£325,000 plus £175,000 from each parent), but the rules are complicated, and the prospect of the nil rate band being fixed for the next 5 years increases the importance of proper IHT planning.

Business Tax

Carry back of losses

Companies and unincorporated businesses can normally set their trading losses against profits of the current or the previous 12-month period, or else carry them forward against future profits. Where a business has made a large loss because of the pandemic, or makes losses in two successive periods, the 12-month carry back may not be enough to relieve the whole amount. The Budget has extended the normal 12-month carry-back to three years, for both unincorporated businesses and companies, for trading losses of 2020/21 and 2021/22. For example, a loss of 2020/21 can be carried back against pre-pandemic profits of 2019/20, 2018/19 and 2017/18; without the extension, the claim could only have been made against 2019/20.

There is a limit on the total amount to be carried back to the second and third earlier year of £2 million in each year of loss for unincorporated businesses and companies that are not part of a corporate group. A group with companies that have capacity to carry back losses in excess of £200,000 will have to apportion the cap between its member companies. The way in which this ‘group cap’ will operate will be announced in due course.

Corporation Tax rates

The Corporation Tax rate will remain 19% until 31 March 2023. It will then increase to 25% for companies with profits over £250,000. Since 1 April 2015, all corporate profits have been taxed at the same rate; the ‘small profits rate’ that was familiar before that will be reintroduced, at 19% for companies with profits up to £50,000, in April 2023. Between £50,000 and £250,000 there will be a tapering calculation that produces an effective marginal rate of 26.5%. The limits will be divided between associated companies under common control.

The two measures described above and below, which allow losses to be carried back for immediate relief rather than carried forward and give enhanced relief for investment in plant up to 31 March 2023, will help with cash flow; however, it should be borne in mind that both of them will give rise to tax relief against liabilities charged at 19%, and will tend to increase later profits that may be taxed at 25%. Such a sharp increase in a tax rate gives rise to planning opportunities and pitfalls to avoid.

‘Super-deduction’ for plant and machinery

For qualifying expenditure on plant and machinery (P&M) contracted for from 3 March 2021 and incurred from 1 April 2021 to 31 March 2023, companies can claim:

• a super-deduction, providing allowances of 130% on new P&M investment that would qualify for 18% writing down allowances (WDAs) in the main Capital Allowance pool;
• a first-year allowance (FYA) of 50% on new plant and machinery investment that would qualify for 6% WDAs in the special rate pool.

The rate of the super-deduction will require apportioning if an accounting period straddles 1 April 2023.

Cars are excluded (with certain exceptions, such as dual-control vehicles used by driving instructors), as are contracts entered into prior to 3 March 2021, even if expenditure is incurred on or after 1 April 2021.

Expenditure incurred under a hire purchase or similar contract must meet additional conditions to qualify for these extra reliefs.

Where the super-deduction has been claimed, there will be a proportionate increase in the proceeds of sale for Capital Allowances purposes. For both the super-deduction and FYA, the proceeds will be treated as balancing charges (i.e. immediately taxable profits) rather than being deducted from pool expenditure.

Annual Investment Allowance

Companies and unincorporated businesses can continue to claim the 100% Annual Investment Allowance on qualifying expenditure up to £1 million until 31 December 2021, subject to transitional rules where accounting periods straddle that date. This may produce more tax relief for companies than the 50% FYA available for special rate expenditure, where it is incurred between 1 April 2021 and 31 December 2021.

Research and Development (R&D)

Small or medium-sized companies conducting qualifying research and development can claim an enhanced deduction of 230% (i.e. £230 for each £100 of qualifying expenditure). Where this produces a loss, it can be surrendered for a payable tax credit of 14.5%.

For accounting periods beginning on or after 1 April 2021, the amount of payable credit that can be claimed is capped at £20,000 plus three times the company’s PAYE and NIC liabilities for the period. This definition also includes some PAYE and NIC liabilities of connected persons doing subcontracted R&D for, or providing workers to, the company.

There are no changes to the R&D Expenditure Credit (RDEC) rules for large companies. However, the Government has announced a review of R&D tax reliefs, with a consultation published alongside the Budget. The intentions are that the UK should remain a competitive location for cutting edge research, that the reliefs continue to be fit for purpose and that taxpayer money is effectively targeted.

Value Added Tax

Registration threshold

The VAT registration and deregistration thresholds will remain frozen at their present levels of £85,000 and £83,000 until 31 March 2024. This will tend to require more businesses to register for the tax as they grow, and therefore represents a small tax-raising measure.

Reduced rate

To help support businesses heavily impacted by the pandemic, the rate of VAT on most supplies by hospitality, leisure and entertainment businesses was cut from 20% to 5% in July 2020. This was initially intended to expire in January 2021, but that was extended to 31 March, and it has now been further extended to 30 September 2021. An intermediate rate of 12.5% will apply for qualifying supplies from 1 October 2021 to 31 March 2022, after which the standard 20% rate will apply again.

HMRC says that there are no plans to introduce ‘anti-forestalling rules’ to counter the VAT saving enjoyed by someone who pays a deposit before the rate goes back up on present plans, that will lock in the lower rate of VAT to the extent that the supply is paid for before 30 September, even if the actual supply takes place later.

Payment of deferred VAT

Businesses could defer the payment of VAT that fell due between March and June 2020. Initially the deferred amount was to be paid in full by 31 March 2021, but businesses can now apply to pay it by interest-free instalments up to 31 March 2022. Applications must be made online by 21 June 2021, but if the scheme is applied for earlier, the payments can be spread over a longer period.

Default surcharge

HMRC has announced that the long-awaited reform of the system of penalties for late payment of tax will be implemented over the next three years, starting with the replacement of default surcharge for accounting periods starting from 1 April 2022. Many of those who have fallen foul of default surcharge regard it as unfair and arbitrary, so it is to be hoped that what replaces it will be a better system. In the meantime, any warnings that default surcharge might be levied should still be taken very seriously.

Making Tax Digital

The Budget also confirms the intention to bring all VAT-registered businesses, including those currently trading below the registration threshold, within the Making Tax Digital reporting system with effect from 1 April 2022.

Stamp Duty Land Tax

Extension of ‘holiday’

The threshold for charging SDLT on residential property in England was temporarily raised to £500,000, with the intention that transactions had to be completed by 31 March 2021. This has now been extended to 30 June 2021, and for transactions between 1 July and 30 September 2021 the threshold will be £250,000. It will revert to the normal level of £125,000 from 1 October, and the normal 2% charge will apply between £125,000 and £250,000.

The Welsh Parliament has also extended the £250,000 nil rate threshold for Land Transaction Tax to 30 June 2021.

Foreign resident buyers

With effect from 1 April 2021, foreign resident purchasers of residential property in England and Northern Ireland will be subject to a 2% surcharge on the Stamp Duty Land Tax they would otherwise pay. This is intended to reduce house price inflation and make property available for first-time buyers.

Other measures

Freeports

The Budget outlines the introduction of ‘Freeports’, areas in which a number of tax and other incentives will operate to encourage trade. Eight areas in England have been announced, with discussions in progress to extend the concept in the other nations of the United Kingdom. The enhanced tax reliefs will include 10% Structures and Buildings Allowances (instead of 3%), 100% First Year Allowances for plant and machinery, full relief from Stamp Duty Land Tax, full Business Rates relief, and relief from Employer National Insurance Contributions. The reliefs will depend on designation as a ‘tax site’ within a Freeport and will run until 30 September 2026.

The English Freeports announced so far are East Midlands Airport, Felixstowe & Harwich, Humber, Liverpool City Region, Plymouth and South Devon, Solent, Teesside and Thames. They are expected to start operating in late 2021.

Compliance

The Budget includes several mentions of increased efforts to crack down on avoidance, evasion and non-compliance. The Government intends to invest £180 million in additional resources and new technology for HMRC in order to bring in £1.6 billion of additional tax revenue between now and 2025/26. The benefits are supposed to include ‘enabling taxpayers to more easily access tax services and make the collection of tax and payments to taxpayers easier’, but the overall effect is clearly intended to raise revenue.

£100 million will also be invested in a Taxpayer Protection Taskforce of 1,265 HMRC staff to combat fraud within COVID-19 support packages. HMRC’s ability to distribute money has been one of the success stories of the pandemic, but giving the cash to people who need it has involved taking the risk that the system can be exploited. They are now going to try to find the people who took advantage.

Income Tax Rates and Allowances

Income Tax Rates and Allowances (Table A)

*PA will be withdrawn at £1 for every £2 by which ‘adjusted income’ exceeds £100,000. There will therefore be no allowance given if adjusted income is £125,140 or more.

†£1,260 of the PA can be transferred to a spouse or civil partner who is no more than a basic rate taxpayer, where both spouses were born after 5 April 1935.

§ If gross income exceeds it, the limit may be deducted instead of actual expenses.

BRB and additional rate threshold are increased by personal pension contributions (up to permitted limit) and Gift Aid donations.

General income (salary, pensions, business profits, rent) usually uses personal allowance, basic rate and higher rate bands before savings income (interest). To the extent that savings income falls in the first £5,000 of the basic rate band, it is taxed at nil rather than 20%.

The PSA will tax interest at nil, where it would otherwise be taxable at 20% or 40%.

Dividends are normally taxed as the ‘top slice’ of income. The DA taxes the first £2,000 of dividend income at nil, rather than the rate that would otherwise apply.

High Income Child Benefit Charge (HICBC)

1% of child benefit for each £100 of adjusted net income between £50,000 and £60,000.

The Scottish rates and bands do not apply for savings and dividend income, which are taxed at normal UK rates.

Registered Pensions (Table B)

Annual relievable pension inputs are the higher of earnings (capped at AA) or £3,600.

The AA is usually reduced by £1 for every £2 by which relevant income exceeds £240,000, down to a minimum AA of £4,000.

The AA can also be reduced to £4,000, where certain pension drawings have been made.

Car and Fuel Benefits (Table C)

Cars

Taxable benefit: List price multiplied by chargeable percentage.

Then a further 1% for each 5g/km CO2 emissions, up to a maximum of 37%. Diesel cars that are not RDE2 standard suffer a 4% supplement on the above figures but are still capped at 37%.

Car Fuel

Where employer provides fuel for private motoring in an employer-owned car, CO2-based percentage from above table multiplied by £24,600 (2020/21 £24,500).

National Insurance Contributions

National Insurance Contributions (Table D)

*Nil rate of employer NIC for employees under the age of 21 and apprentices under 25, up to £967pw.

Employer contributions (at 13.8%) are also due on most taxable benefits (Class 1A) and on tax paid on an employee’s behalf under a PAYE settlement agreement (Class 1B).

Class 2 (Self employed)

Class 3 (Voluntary)

Class 4 (Self employed)