Budget 2021: Entrepreneurs & Companies - what is changing for tax?
On Wednesday 3 March, Chancellor Rishi Sunak announced the spring Budget, doubling down on his commitment to do “whatever it takes” to protect lives and jobs affected by the global pandemic. The contents of the Budget were perhaps not as harsh as was first expected, and notably, the Chancellor predicted that the UK economy is on course to recover to its pre-pandemic size by the middle of 2022.
In terms of tax, while the Budget did not abolish business asset disposal relief, introduce a one-off wealth tax or immediately increase tax rates (as was initially feared), some key changes were announced which will affect the following groups:
Individuals in business
From 6 April, a slightly increased tax-free personal allowance of £12,750 for basic rate taxpayers and £50,270 for higher rate taxpayers will be frozen until 2026. There will be no changes to rates of VAT, income tax or national insurance.
While this could mean that individuals in business pay less in dividend and capital gains tax (CGT) or even avoid it altogether, any future increases in pay, dividends, capital gains or inheritance may well fall into the taxable zone. The current CGT allowance for each individual is £12,300 - this is the maximum amount of tax-free profit which can be made through selling a qualifying asset. As above, the Chancellor announced that this allowance will also be frozen until 2026.
Entrepreneur’s relief, which was cut in the April 2020 Budget, is set to remain at the same level throughout 2021-22. Similarly, the dividend tax-free allowance will remain at £2,000 for the 2021-22 tax year.
Corporation tax is payable by all UK limited companies, as well as some organisations such as societies and co-operatives, even if they are not incorporated.
Perhaps the most significant tax announcement in the Budget is the proposal to raise levels of corporation tax from 19% to 25% in April 2023. While this proposal has already garnered some criticism, it is expected that only 10% of companies will be expected to pay this higher rate. Smaller companies, with profits under £50,000, will still be able to take advantage of the lower rate of 19%. A tapered rate will apply to companies with profits between £50,000 and £250,000, and only companies with profits in excess of £250,000 will be liable to pay the full 25% rate.
"The Chancellor insists that, despite the rise, it will still remain the lowest rate of corporation tax compared to other G7 countries"
Additionally, a new ‘super deduction’ tax relief was also announced to encourage business investment. This scheme is set to cut taxes by 25 pence for every pound invested, and is expected to generate £25bn to UK businesses over the next two years. Further, for two years from April 2021, companies investing in qualifying new plant and machinery assets will benefit from a 130% first-year capital allowance.
A broader UK tax plan?
Although the Budget was primarily focused on financial recovery following the global pandemic, it also took into account the UK’s post-Brexit position on the international stage.
Since the conclusion of the Brexit deal on Christmas Eve 2020, commentators have predicted that the UK is on its way to becoming a low-tax, low-regulation country. While the deal said surprisingly little about taxation, it contained certain clauses which implied a ‘supersized tax haven’ was on the agenda, such as a provision which removed obligations for the UK to comply with the EU’s Code of Conduct on Business Taxation. However, the Chancellor announced in the Budget that legislation will be introduced in the Finance Bill 2021 to strengthen the existing mechanisms in place to tackle tax avoidance schemes.
Further, the government has scheduled a ‘Tax Day’ to take place on 23 March, where it will launch various tax consultations and calls for evidence. Hopefully, this will allow for the ‘mapping out’ of any more significant tax changes to be expected in the near future.
Get in touch
If you’d like to find out more about this update, please get in touch with Sean Halliwell.
This article was prepared by Tom Revitt.
Our corporate team are on hand to explain the new tax proposals and provide up-to date advice. If you would like to find out more about these, as well as the spring Budget’s other key points, please do not hesitate to contact us.
All information in this update is accurate at the time of writing. It is meant for general information only and is not legal advice.