Budget 2021 – what you need to know
Chancellor Rishi Sunak has delivered his tax and spending plans for the year ahead. Here we explore how they could impact your personal finances.
Billed as the budget of ‘protecting the jobs and livelihoods of the British people’, it was the most highly anticipated of its kind in recent history. Over the course of the current tax year, government net borrowing will have hit a record £355bn. At 17% of national income, that represents the highest level of net borrowing since World War Two.
This eye-watering figure is, of course, largely due to the mounting cost of providing financial support to help businesses survive during the pandemic. But with the number of people vaccinated now topping 20 million, and Boris Johnson outlining the UK’s roadmap back to normality, the chancellor is now seeking to plug the gaping financial hole left by Covid-19.
As with any Budget, we watched closely to assess the potential impact on our clients’ personal finances. Any changes to the tax regime can have an impact on your financial future and here we focus on those most likely to be pertinent to your current financial planning requirements.
Mixed news for business owners
If you’re a business owner and set up as a limited company, a painful tax rise is in store. From April 2023 corporation tax increases 6 percentage points – its largest hike since 1974 – from 19% to 25%.
On the plus side, there will be a taper system to protect the smallest businesses. Firms making £50,000 or less during the tax year will remain at the current rate of 19%, and those with profits between £50,000 and £250,000 can obtain relief through a taper system. While clearly a benefit for many small businesses, the corporation tax landscape will become more complex.
If you are concerned about the potential impact of this new regime, there are some steps you can start thinking about now to limit your firm’s annual tax bill.
Mr Sunak also announced a ‘super deduction’ scheme over the next two years, enabling firms to claim 130% on any expenses for business investment purposes.
Company pension contributions are an allowable business expense and making them can already be an effective way of reducing your corporation tax exposure. Once the new regime kicks in, there could be additional benefits for companies with profits landing between the taper thresholds as you may be able to reduce your overall effective rate of corporation tax.
Sole traders and partnership aren’t affected by any of this as your profits are subject to income tax.
Other measures for small business will be more warmly welcomed. For those of you in sectors hardest hit by the pandemic, VAT will remain at its reduced rate of 5% until the end of September, before rising to 12.5% for the remainder of the tax year. If you’re in England and currently benefiting from a business rates holiday, this is also now extended to June with a 75% discount after that.
Longer-term impacts for individuals
While there were no headline tax-rises for individuals – income tax, national insurance, inheritance tax and capital gains tax rates all remain unchanged – numerous tax-free allowances and thresholds have been frozen, many until 2026. That means those of you with rising assets and pensions could be facing greater tax bills in future years.
Your personal income tax allowance, the amount you can earn before any income tax is payable, will rise from £12,500 to £12,570 at the start of 2022, then remain at that level until 2026. If you’re in England, Wales or Northern Ireland, the same applies to the higher rate income tax threshold (40%) which will be frozen at £50,270 from 2022 to 2026. This means that any wage rises during this period will tip more people into either the 20% or 40% tax brackets.
An additional pitfall of freezing the 40% tax threshold is the impact on child benefit. As things stand, anyone with total net annual earnings between £50,000 and £60,000 sees their child benefit payments reduce by £1 for every £2 earned above the lower threshold. If earnings increase over this period, more people could see their child benefit reduce or go completely.
Again, making pension contributions can help here. Those of you in receipt of £50,000 or more in net adjusted income could reduce your potential income tax while also retaining child benefit.
Capital gains tax
Many of you may have breathed a sigh of relief that Mr Sunak did not press ahead with the Office for Tax Simplification’s recommendations to raise capital gains tax in-line with income tax. But savers may not be out of the woods on this yet. The Treasury’s decision to hold a ‘tax day’ on March 2023 suggests capital gains tax rises might still be on the government’s radar.
The inheritance tax nil rate band, the value of assets your estate can distribute on your death before any IHT is payable, will be frozen at £325,000 until 2026. The same will apply to the residence nil rate band (covering your home), which will remain level at £175,000.
There’s little surprise here given the nil rate band has remained static for more than a decade. But it will result in more and more people tripping into IHT territory.
ISA, Junior ISA and Child Trust Fund savings allowances are all frozen at their current levels of £20,000, £9,000 and £9,000 respectively.
The pensions lifetime allowance, the maximum tax-free value of your pension savings, will remain at £1,073,100, again until 2026. If you have total pension savings in and around this figure, or expect you might get to that level over the next few years, you should think carefully about making any future contributions and review the assets your savings are invested in. Any pension savings north of the lifetime allowance could be taxed at 55%.
Support for you
It’s worth taking a bit of time to think through whether any of the Budget provisions may potentially impact on your business, your earnings and ultimately your lifestyle. And also whether that might mean you need to make a tweak or two to your current financial plans.
The good news is, we are here to help. Our financial planners have many years of expertise helping both businesses and individuals mitigate any potential tax liabilities, as well as making sense of the inherent complexities within both the inheritance tax and pension tax systems. We would be more than happy to arrange a meeting with you to discuss how to set up your business or personal finances in the most effective way for the year ahead and beyond1.
1 All allowance and tax rate figures quoted are taken from HM Treasury’s Budget document – March 3 2021