The Chancellor of the Exchequer, Rishi Sunak has presented the March 2021 UK budget, with a series of financial measures to assist the country through the next phase of the pandemic. After bearing the brunt of three lockdowns and the consequent crippling of the economy, the budget includes £407billion aimed towards supporting struggling businesses and individuals.
It is to be noted that the government has opted to freeze many tax thresholds until 2026 in order to provide stability and a degree of certainty that will allow people to have the confidence to plan for the future. Some of the freezes include, personal income tax, National Insurance (NICs), Inheritance Tax (IHT), Lifetime Allowance (LA) and the CGT annual exception.
Changes that may affect you
A halt on personal income tax, Value Added Tax (VAT) and NICs has been implemented, with Sunak stating that an increase would be “unfair”. The “sting in the tail” is that the personal income tax free allowance will be frozen at £12,570 and the higher rate tax band threshold will also be stabilised at £50,270. This is estimated to push an additional 1.3 million taxpayers into the 40% – 45% bracket for earnings above £150,000. This is a clever way for the government to raise an estimated £19bn over the next five years while staying true to their promise of not raising personal income tax rates.
The Inheritance Tax (IHT) nil rate band and Lifetime Allowance (LA) have also been cemented until 2026, meaning that by 2026 the IHT nil rate band would have been untouched for 16 years. The IHT rate has, at least for this budget, stayed at the current level of 40% on estates valued over £325,000. It will be interesting to see what changes are announced in Sunak’s Autumn Budget, especially given the Office of Tax Simplifications report in November 2020 made many recommendations, including the following:
- Alignment of the CGT rate with that of income tax rates
- The reintroduction of a form of relief for inflation
- A reduction to the annual CGT tax free allowance, intended to act as an administrative de minimis but often in practice, an allowance that drives a “churn” behaviour in run up to the 5 April year end
- The abolition of the IHT reliefs to simplify the interaction between CGT
Much to the relief of many investors, changes implemented in the 2020 budget for entrepreneur’s relief were left untouched with company founders still being able to pay a discounted CGT rate of 10% on the sale of their business.
In a move similar to Australia, the UK Government is looking to deter foreign investment by implementing a 2% non-resident stamp duty land tax from 1 April 2021 to all residential rates of Stamp Duty Land Tax (SDLT). This tactic is targeted at lowering inflated property prices, “turning a generation of renters into a generation of buyers”. This will be further accelerated by the extension of the £500,000 stamp duty holiday until June 2021, with this steadily decreasing to £250,000 until September 2021 before reverting to the original £125,000. The hope is that the economy will see a flood in the market as many seek to purchase property before the finalisation of the stamp duty holiday.
Changes that will affect businesses
Sunak announced the government’s decision to uphold their promise to continue to support employers and employees who have been forced into shutdown by extending the Furlough Scheme until September 2021. Support will continue to be provided to eligible businesses, with employees receiving 80% of their normal salaries for hours not worked (up to £2,500 per month). However, employer’s requirement to pay National Insurance Contributions (NICs) and pension contributions for hours worked and unworked will increase to 20% in August 2021 from the current 10% contribution rate.
To help restore public finances, companies that have profited from the pandemic will be asked to pay more in the future, with Corporation Tax (CT) on company profits rising from 19% to 25% in April 2023. Though, small businesses making a profit of £50,000 or less will continue to be taxed at the current rate of 19%, making CT only applicable to 30% of companies. A taper above £50,000 will also be introduced so only businesses with profits greater than £250,000 will be taxed at the full 25% rate.
The government is also motivating business investment with a view to kick start the economy, the focus being on plant and machinery investment. The Chancellor stated during his hand down that “right now, while many businesses are struggling, others have been building up significant cash reserves. We need to unlock that investment, we need an investment led recovery”. To endorse this, he announced the super-deduction, a 130% deduction on a company’s investment into plant and machinery over the next two years.
This super deduction is designed to stimulate spending and growth in the manufacturing industry, with the UK economists predicting the UK to place 1st in the OECD’s world ranking for business investment, a massive leap up the rankings from the current 30th place. However, the sale of these assets will incur a higher CT rate once sold in the future, so deductions available now at a low CT rate will incur a higher CT rate when the equipment is sold.
A further effort to stimulate the economy and get people out and about is the extension of the reduced VAT rate of 5% for hospitality and tourism until 30 September 2021. The rate change will be applied to entrance fees at attractions but, not to supplies provided during visits and it excludes entry into sporting events. This will cost the government an estimated £4.7bn although, the loss is hoped to be far outweighed by Brits spending up big on local attractions after enduring three major lockdowns.
It is clear that the March budget has been aimed towards stimulating immediate spending within the UK economy by providing momentary stability. However, the cost to the British taxpayer will begin to be felt from 2026 when the tax allowance and threshold freezes will start to lose effect.
Can the UK spend its way out of this dire economic position, where its estimated that the debt is more than £30,000 for every person in the UK? No doubt more changes will come with the Autumn Statement in November 2021 with the threat of changes to CGT and IHT following the OTCs reviews and recommendations.