What does the Budget mean for tax on your income? Emma Boutcher of Hazlewoods
The recent Budget confirmed there will be modest increases in the personal allowance, from £12,500 to £12,570, and the higher rate tax threshold, from £50,000 to £50,270, for the 2021/22 tax year, with no change to the tax rates.
National insurance thresholds will also see a small increase, but with no change to the rates. The primary threshold (applicable to employee's contributions) will rise from £9,500 to £9,568 and the secondary threshold (for employer's contributions) will rise from £8,788 to £8,840.
The Government announced that these thresholds will stay in place until April 2026. However, the next general election is due in May 2024 (subject to the possible scrapping of the Fixed-term Parliaments Act), so we will have to wait and see if this proves to be the case.
The Government has therefore stuck to its manifesto pledge not to increase the rates of income tax and national insurance, instead relying on increases in taxpayers' earnings to raise additional tax revenue. By freezing the personal allowance for the next five years, those who currently earn below £12,570 and pay no tax are more likely to become taxpayers if their income increases. Taxpayers who earn no more than £50,270 currently pay tax at the basic rate of 20 per cent but pay increases could take them into the higher rate tax bracket where they will be taxed at 40 per cent.
The income threshold of £100,000 where the personal allowance begins to be restricted will not increase (and has not done so for a number of years), so more taxpayers could see themselves losing the benefit of their personal allowance, which creates an effective tax rate of 60 per cent.
Similarly, the income threshold of £50,000 where child benefit payments begin to be clawed back is not changing, so once again, pay increases could mean a higher tax liability for those who claim the benefit.
These two income thresholds are measured against 'net income', which is total income less pension contributions and gift aid payments. Therefore, the personal allowance could be preserved and/or the child benefit clawback avoided by increasing either of these types of payments.
What about businesses?
The key announcement in the Budget, aimed at rebalancing public finances, was a significant increase in the rate of corporation tax. From 1 April 2023, the rate will increase from 19 per cent to 25 per cent. This will apply to companies with profits of £250,000 or more. Companies with profits of up to £50,000 will continue to pay tax at 19 per cent and there will be an effective rate of 26.5 per cent on profits between £50,000 and £250,000.
The following illustration shows the impact of this change:
Where possible, companies should look to accelerate income into an accounting period ending before 1 April 2023 and defer revenue expenditure to an accounting period beginning after that date.
For those businesses that operate through a company, drawing out profits by way of a dividend can be tax efficient, despite the fact that the dividend is not deductible for corporation tax purposes. Paying a salary does attract a corporation tax deduction but may also attract a national insurance liability for both the individual and the company. The higher corporation tax rate applicable from April 2023 will mean the deduction afforded to salaries is more valuable, so it could be worth revisiting the owners' remuneration strategy.
Employer pension contributions attract a corporation tax deduction but do not give rise to any tax payable by the individual, provided they fall within the individual's available pension allowances. The introduction of the higher corporation tax rate could be a good time to consider whether employer contributions should form part of the owners' remuneration package.
Some of the other measures affecting businesses that were announced in the Budget were:
Extended carry back of trading losses
At present, companies, sole traders, and partners can carry back trading losses to offset against income in the previous year. For 2020/21 and 2021/22, this will be extended to allow up to £2 million of losses for each relevant period to be carried back to offset against profits from the same trade in the previous three years. This should assist businesses that have suffered losses during the coronavirus pandemic by providing them with a cash flow benefit in receiving tax repayments from earlier years.
Capital allowances 'super deduction' for companies
A 'super deduction' is to be introduced whereby new (i.e. unused) plant and equipment bought by the company will qualify for an uplifted deduction of 130 per cent against its profits. For example, if the company spends £100,000 on new equipment, its profit would be reduced by £130,000 for tax purposes. This will apply from 1 April 2021 to 31 March 2023, so companies considering investing in new equipment may wish to delay the expenditure until after 1 April 2021 to maximise the tax relief. Unfortunately, this measure does not apply to unincorporated businesses, which would seem to be a quid pro quo for the forthcoming increase in corporation tax.
The Government has spent an extraordinary amount propping up the economy over the past 12 months and the Budget provided for further financial support that is desperately needed by many until the pandemic becomes a thing of the past. With plenty of giveaways and only a handful of tax raising measures, it remains to be seen whether we will see further tax changes, perhaps in an Autumn Budget.
This article is intended to give an overview of some of the measures announced in the Budget. As always, we recommend seeking professional advice before undertaking any form of tax planning, as tax legislation is complex and certain conditions may need to be met in order to obtain the desired benefits.
If you would like to discuss how you might improve your tax efficiency, please contact Emma Boutcher, associate director at Hazlewoods Business Advisers and Chartered Accountants, at email@example.com or call 01242 237661.
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