Insights

Budget 2021: Income tax

  • Written By: Ami Jack
  • Published: Wed, 03 Mar 2021 15:40 GMT

The Chancellor has followed the Conservative Party's manifesto promise not to increase the rates of income tax or national insurance contributions. Freezing the personal allowance and income tax rate bands from next year, however, will effectively increase the tax burden on many individuals over time. The pension lifetime allowance has also been frozen at its 2020/21 level.

Personal allowance, income tax and national insurance rates and thresholds

The personal allowance and basic rate tax band will increase in line with inflation from 6 April 2021 but thereafter remain frozen at these levels until 5 April 2026. Income tax rates remain unchanged.

As previously announced, the income tax personal allowance and basic rate band will increase, in line with inflation, to £12,570 and £37,700 respectively from 6 April 2021. These thresholds will be fixed at these levels for the following four tax years.

The respective upper earnings limit and upper profits limit for Class 1 and Class 4 national insurance contributions will also increase in line with inflation and will remain aligned with the higher rate threshold of £50,270 until April 2026.

Income tax rates remain unchanged.

Our comment

The increase in the personal allowance and basic rate band in line with inflation is expected and is in line with previous announcements and will result in taxpayers experiencing a reduction in their income tax liabilities from 6 April 2021.

The level of individuals’ taxable income may well increase over the coming years, potentially significantly if the country experiences a period of high inflation. The fact that these bands are frozen will mean that more taxpayers may start exceeding their personal allowance, and others will start to become higher rate taxpayers.

When will it apply?

From 6 April 2021

Starting rate for savings income

The starting rate band for savings income, to which a 0% rate of tax applies, remains unchanged at £5,000 for the 2021/22 tax year.

The starting rate of 0% is available to taxpayers whose only source of income is from savings and investments, or whose taxable non-savings income after deducting the personal allowance is less than the starting rate band (SRB). The SRB has been set at £5,000 for a number of years and this will continue to apply for the 2021/22 tax year.

Our comment

This longstanding simplification measure ensures that taxpayers with limited income are less likely to be required to file tax returns with HMRC. With interest rates at all-time lows, however, and given the SRB has been capped at £5,000 for several years, this measure is of limited application to many taxpayers.

When will it apply?

From 6 April 2021

ISA, Junior ISA and child trust fund annual subscription limits

The ISA, Junior ISA and child trust fund annual subscription limits will remain unchanged from 6 April 2021.

The annual subscription limits for ISA, Junior ISA and child trust funds are currently £20,000, £9,000 and £9,000 respectively. It has been announced that these limits will remain unchanged from 6 April 2021.

Our comment

The decision to keep the ISA, Junior ISA and child trust fund annual subscription limits the same was expected. This was widely reported in the build up to the Budget and means that taxpayers can remain confident in their ability to make use of these allowances going forward.

When will it apply?

The subscription limits will remain unchanged until 5 April 2022

Extension of the social investment tax relief scheme

The social investment tax relief (SITR) scheme will be extended to 6 April 2023, continuing the availability of specific tax reliefs for investors in qualifying social enterprises.

The SITR scheme, originally introduced in 2014, and due to end on 6 April 2021, will continue until 6 April 2023.

The scheme is designed to support social enterprises in raising funds to be used in the trading activity of their community interest company, community benefit society or charity.

Individuals investing in such entities by way of shares or specific loans can receive income tax relief and capital gains tax deferral following their initial investment, with a potential exemption from capital gains tax on any gain realised on disposal.

There are several qualifying conditions that both the social enterprise entity and the investor need to satisfy, and a number of trades are excluded.

Our comment

This is expected to be a welcome announcement for social enterprises, charities and community businesses, many of which have seen their trading activities and cash reserves significantly impacted by the pandemic.

The announcement may also help draw attention to a relief of which people are perhaps less widely aware than other venture capital schemes.

When will it apply?

Extension of current regime from 6 April 2021 until 6 April 2023.

Temporary changes to the trading loss relief carry back rules for businesses

To help businesses weather the economic impact of COVID-19, the corporation tax and income tax trading loss carry back rules will be temporarily extended. The amendment will allow relief to be carried back to the previous three years rather than the usual one year.

What it means for companies

The Government has announced an extension to the carry back of trading losses for corporation tax made in accounting periods that end between 1 April 2020 and 31 March 2022.

In addition to the usual one-year carry back against total profits, the losses may be carried back a further two years against profits of the same trade. Losses are carried back against later years in preference to earlier years.

There is a £2m cap for trading losses being carried back more than one year. Losses carried back one year are unlimited, as before. A separate £2m cap applies for each period of 12 months within the duration of the extension. For example, a company with a 31 March year end will have one £2m cap for its 2021 year end and a second £2m cap for its 2022 year end.

If the amount of the claim is not (and could not be) more than £200,000, the claim can be made outside of the tax return. In calculating if the £200,000 threshold is exceeded, the company must consider all capital allowances or any other claim or reliefs available to it.

The £2m cap applies to groups of companies, unless all group companies’ claims are individually below the threshold, so loss-making groups will need to decide how best to utilise losses amongst members. Groups subject to the £2m cap must submit an allocation statement showing how it has been allocated between its members.

What it means for unincorporated businesses

For income tax, trading losses made in the 2020/21 and 2021/22 tax years are subject to these new rules. Sole traders must offset losses against profits of the same trade. Losses are carried back against later years in preference to earlier years.

There is a separate cap of £2m for each tax year of loss. A sole trader therefore has a £2m cap for 2020/21 and another £2m cap for 2021/22.

Sole traders can make a claim in their tax return, or if the claim affects more than one tax year, a standalone claim may be made.

HMRC will not give effect to claims and make repayments until Finance Bill 2021 receives Royal Assent.

Our comment

This is good news for certain businesses struggling because of COVID-19, enabling them to offset trading losses against earlier years of profit to obtain a tax repayment to aid their cashflow.

For companies, the ability to claim outside a tax return is also a welcome simplification for losses of £200,000 or lower. This should allow companies to obtain repayments without having to wait for the submission of the tax return for the loss making period.

For sole traders, these new rules mean they may be able to reduce their marginal rates of income tax in the earlier years.

The extension to the relief does not, however, apply to property businesses who may be struggling because of loss of tenants, especially those in the retail sector.

When will it apply?

For companies, it will apply to losses made in accounting periods ending between 1 April 2020 and 31 March 2022.

For unincorporated businesses, it will apply to basis periods ending in the 2020/21 and 2021/22 tax years.

Tax deductibility of business rates repayments

It has been confirmed that repayments of business rates relief are tax deductible for both corporate and income tax purposes.

Following the Government support throughout the COVID-19 pandemic some businesses have repaid relief received from the Government; such as repaying business rates reductions. Where this has been returned to the Government or relevant public authority, a corporate or income tax deduction will be permitted as an allowable expense to ensure parity with the tax treatment of the original expenditure.

Our comment

This is an expected clarification and puts businesses back into the tax position they would have been in should the rates have been paid in full prior to the availability of the relief. The deduction is allowed in the same accounting period in which the original liability would have been due and paid, and will be limited to the original liability. This relief overrides existing rules regarding allowable expenses to the Government in respect of coronavirus support.

When will it apply?

The relief will apply retrospectively once enacted in Finance Bill 2021.

Tax exemption for reimbursed home office expenses

The temporary income tax and Class 1 National Insurance contributions (NICs) exemption, for the reimbursement by employers of expenses incurred by employees in acquiring relevant home office equipment, will be extended until 5 April 2022.

This temporary measure was originally due to end on 5 April 2021 and was introduced to provide certainty that employees could receive reimbursement for relevant expenses free of income tax and NICs. The exemption will now apply until 5 April 2022.

For the exemption to apply, the reimbursement must be available to all employees on similar terms and the expenditure must have been on equipment acquired for the sole purpose of making it possible to work from home as a result of the COVID-19 pandemic. It also needs to have been tax exempt if the cost were incurred directly by the employer.

Home office equipment includes anything that is deemed necessary for the employee to work from home as a result of the COVID-19 pandemic. This includes the cost of a laptop, desk, office chair and other necessary computer accessories.

Our comment

The usual tax exemption only applies in circumstances where the employer provides equipment directly to their employees, with only insignificant private use.

This continued temporary relaxation of the rules is a welcome recognition that in many cases it has been more difficult for employers to provide equipment directly to their employees as a result of the COVID-19 pandemic.

When will it apply?

The existing provision will continue until 5 April 2022.

Income tax exemption for COVID-19 tests

The Government will introduce and extend the income tax and National Insurance contributions (NICs) exemption for providing or reimbursing COVID-19 antigen tests.

The Government has announced a temporary income tax and NICs exemption for payments made to employees so that they can meet the cost of a COVID-19 antigen test. An exemption already exists for employer-provided tests.

The new exemption for payments made to employees will apply with retrospective effect to any payments made during the 2020-21 tax year and will continue to apply until the end of the 2021-22 tax year.

The existing exemption for employer-provided tests will be extended until the end of the 2021-22 tax year.

These exemptions will not apply to antibody tests.

Our comment

The provision of testing for employees will be vital in the months to come to ensure that employees can return to work safely. It will allow employers to protect the health of their employees and assist with the wider effort against COVID-19 without creating additional liabilities to tax. The Government has also aligned the tax treatment of employer reimbursement of testing costs with the treatment of employer-provided tests.

When will it apply?

The change will apply from the date of Royal Assent to the 2021 Finance Bill.

More COVID-19 support for the self-employed

As well as releasing details of the expected fourth grant under the self-employment income support scheme (SEISS), the Chancellor has confirmed that a fifth grant will be available, extending support to the end of September. Eligibility for these grants will be based on data from 2019/20 tax returns, so they will be available to around 600,000 of the newly self-employed who were excluded from the previous support.

The fourth grant has been set as 80% of three months' worth of average trading profits, designed to provide support for February to April 2021. To be eligible, traders must have filed a self-assessment return for 2019/20 by 2 March.

The fifth grant will cover May to September, and is two-tier. For those traders whose turnover was reduced by 30% or more in the tax year ended 5 April 2021, it will be worth 80% of three months' worth of average trading profits. If the turnover reduction was under 30%, it will only be worth 30% of three months' worth of average trading profits.

All other eligibility criteria remain the same as for the previous grants, but based on the most recent data from 2019/20 tax returns, as they were due to be filed by 31 January 2021. This means that those self-employed who began to trade in 2019/20, or too late in 2018/19 to be eligible, may now be able to claim support.

Only those self-employed persons whose businesses have been adversely affected by the pandemic in the period in question will be eligible, provided that they are still trading or intending to resume. As with the previous grants, each grant will be paid as one lump sum with a separate application process. They will be taxable as trading profits.

Our comment

This will be welcome news to those self-employed who are newly eligible, estimated to be 600,000 traders, but after a year of no support many may no longer be trading, which prevents them from claiming the grants.

Other categories of taxpayers excluded from support, such as the self-employed with profits over £50,000, and those working through limited companies, will be disappointed that the extended support does not benefit them.

The unexpectedly generous extension of support to 30 September will be welcomed by all eligible. The fifth grant is however stated as covering a five month period, but based on a percentage of three months' worth of profits, so per month it is a lower percentage than the headline figure of 30% or 80%.

When will it apply?

Applications for the fourth grant will open in late April, and the fifth and final grant can be claimed from late July.

Self-employment support grants taxable in year of receipt

Grants received under the self-employment income support scheme (SEISS) are to be taxed in the tax year in which they are received. Applications for the fourth and fifth grant will only open next tax year, so will all be taxable with that year's profits.

All grants made under the SEISS are taxable, but currently the legislation only provides for them to be taxed in the tax year ended 5 April 2021. The need to extend the scheme into the next tax year was not anticipated when it was drafted.

The first three grants will be taxable in 2020/21, and the fourth and fifth grants taxable in 2021/22. The fourth grant covers the period from 1 February 2021 to 30 April 2021, but applications for it will not open until late April 2021, so the grants will be taxable in the next tax year.

Our comment

This is a simple change to a more logical approach, rather than taxing all grants in this tax year. An alternative would have been to tax the fourth grant partially in this tax year, and partially in the next, as the period it covers straddles the two years. Taxing the grant simply on date of receipt will be more straightforward for the recipients.

When will it apply?

This will affect SEISS grants received on or after 6 April 2021.

Clawback of self-employment support from those not entitled

This measure will allow the Government to clawback the grant from a self-employed individual who was entitled to the grant at the time of claim, but whose circumstances subsequently changed such that they were not entitled. Current measures only allow clawback if the individual was not entitled to the grant at the time they claimed it.

In order to claim a grant under the self-employment income support scheme (SEISS) an individual must meet various criteria. These include a reasonable expectation that their business will be adversely affected by the pandemic in the period in question. The grants are generally claimed part way through the period, and a full financial picture may not be available for sometime after.

This measure will allow HMRC to claw back grants paid to those who were entitled to the grant at the time when they claimed it, but subsequently ceased to be entitled to all or part of the grant. The criteria for ceasing to be entitled are not set out, but are likely to be that trading profits turn out to be too high either to be eligible for the grant, or for the higher rate of the two tier fifth grant.

This will take the form of a 100% tax charge on the overpaid grant. Currently, the legislation allows HMRC to clawback SEISS grants claimed by those who were not entitled to them at the time of making the claim.

This change will only apply to the fourth and fifth grants under the scheme, applications for which are yet to open. It will not apply to the previous grants.

Our comment

Superficially, removing grants from those who turn out not to need them makes sense, but practically it creates enormous uncertainty.

If traders applying for the grants cannot be sure that they will not need to be repaid, then they may be reluctant to claim them, or use them in the business once received. Some may not realise that these need to be paid back until near to the tax due date, and find themselves in a difficult financial position.

When will it apply?

This will apply to SEISS grants made on or after 6 April 2021.

Coronavirus Job Retention Scheme extension

The Coronavirus Job Retention Scheme (CJRS) is being extended until 30 September 2021. This is to protect jobs as the COVID-19 restrictions are eased gradually over a prolonged period.

During the COVID-19 pandemic, the Government has provided support to businesses and protected jobs by providing grants covering a proportion of employees’ salaries.

The operation of the CJRS will not change for the months of May and June. Broadly, this means employers will receive a grant equal to 80% of furloughed employees’ remuneration for the hours they do not work. This allows employees to be furloughed flexibly, as business activity returns to normal.

The amount that can be claimed by businesses will be gradually reduced from July onwards. For the month of July, employers will only receive 70% of furloughed employees’ remuneration. For August and September, the figure will be reduced to 60%.

This reduction will be made up by increased employer contributions. For the month of July, the Government will introduce an employer contribution of 10% towards the pay for unworked hours, up to a monthly cap. For August and September this will be 20%.

Our comment

The CJRS has provided many employees with much-needed certainty over their income and meant that, as the economy reopens, employees’ jobs are still in place.

Extending the CJRS to September allows businesses to plan for employees’ return. The extended support will provide relief for many employers who plan to re-open gradually and who are still affected by the continued restrictions.

When will it apply?

The extension takes immediate effect.

Pension lifetime allowance frozen for next five years

The pension lifetime allowance of £1,073,100 has been frozen until 5 April 2026. Those with accumulated pension funds nearing or above £1million will find themselves reaching or breaching the lifetime allowance sooner than otherwise anticipated.

The lifetime allowance (LTA) is the value of a pension fund an individual is allowed to accrue before suffering additional tax charges when benefits are taken.

The current LTA of £1,073,100 was due to increase with inflation on 6 April 2021. This announcement sees the inflation linking removed until at least 2026.

This will increase the number of people who will be affected by lifetime allowance charges, whether in defined contribution pensions, like SIPPs and group schemes, or defined benefit schemes, such as the final salary schemes within the public sector.

Our comment

Many of those affected by this freeze will be of working age, currently accruing pension benefits. Even if they are not contributing, modest growth in a large pension fund can easily breach the lifetime allowance, potentially incurring substantially increased charges if taken as a lump sum.

Some individuals may still have the option to apply to protect higher amounts by applying for individual or fixed protection 2016.

Those affected by the new tapered annual allowance are often also impacted by the lifetime allowance and may need to consider the interplay between these two factors.

When will it apply?

From 6 April 2021

Collective defined contribution pension schemes to be written into legislation

Collective defined contribution pension schemes, also known as collective money purchase pension schemes, are to be introduced in the Pension Schemes Act 2021.

This provision will mean the introduction of a new pension scheme design already used widely in other countries such as Canada and Holland. It is an alternative to traditional defined contribution and defined benefit pension schemes

Collective defined contribution schemes will now be able to operate in the UK as registered pension schemes for tax purposes.

Our comment

These risk sharing schemes have attracted a high level of interest in the UK and are believed to offer many advantages to both employers and members alike.

Collective defined contribution pension schemes, which allow for the pooling of contributions and investments, will be able to give members a target benefit level in retirement. Employers will be able to offer employees a pension income from the scheme assets without the risk and cost impact of sponsoring a defined benefit plan.

When will it apply?

To be legislated in the Pension Schemes Act 2021.

Reform of penalty regime for self-assessment taxpayers

The current penalty regime will change to a points-based system for late submission, and a percentage-based penalty for late payment. This is effective from 6 April 2023 for some taxpayers, and will be universal the year after.

Late submission penalties will be points based. Individuals will incur a point for each failure to meet a submission deadline and, once the points threshold is reached, a fixed £200 penalty applies for each failure.

The threshold will be 2 points for taxpayers who file their tax return annually, but a higher threshold can apply where submissions are due more frequently than annually. Penalty points will also expire after 24 months of continued compliance with filing deadlines.

The new late payment penalty regime will apply penalties calculated as a percentage of underpaid tax at set trigger points. The first penalty will be charged after 15 days at 2%, or will be charged at 4% if between 16 and 30 days late. A second penalty will be charged at an annualised rate of 4% from day 31, calculated on a daily basis.

Time to Pay arrangements and reasonable excuse provisions will still apply to help those who have difficulty meeting their payment obligations. Taxpayers will retain the right to appeal penalties.

Our comment

The attempt to harmonise the penalty regimes across all taxes, and to introduce a system that is less punitive for those who suffer one-off failures to meet their obligations is to be applauded. Given that the proposed measures have previously been the subject of consultations, it is however surprising that the conditions required to deliver such a system are unnecessarily complicated, and will likely involve keeping records of submissions across a number of years. This could be particularly onerous for those becoming liable to report quarterly under the Making Tax Digital regime, which will be introduced from April 2023.

The new late payment regime will be stricter than the current rules, with a penalty applying where taxpayers fail to make payment or agree a Time to Pay arrangement within 15 days of the payment. It is welcome, therefore, that HMRC has agreed to take a light-touch approach in the first year of operation, providing a taxpayer is doing their best to comply.

The replacement of the six-month and twelve-month penalties with a daily penalty, which is more akin to an interest charge, is a simplification measure albeit one that may make such penalties more severe for taxpayers with large unpaid tax liabilities. It becomes more important than ever, therefore, to ensure the timely preparation of tax returns to allow sufficient time for individuals to arrange payment or to conclude Time to Pay agreements with HMRC.

When will it apply?

From 6 April 2023 for taxpayers with annual business or property income above £10,000, and to all taxpayers from 6 April 2024.

Follower notices and penalties

Non-compliance penalties on follower notices will be changed to incentivise taxpayers to accept HMRC’s decision at an earlier stage. The maximum penalties for non-compliance attached to follower notices will be reduced from 50% to 30%. A further penalty of 20% will, however, be charged on those taxpayers who are found to have acted ‘unreasonably’ in continuing to litigate against HMRC's decision.

Follower notices can be issued by HMRC to taxpayers who have used the same tax avoidance scheme as another taxpayer whom HMRC has already succeeded against in litigation. They require the recipient to remove the tax advantage they obtained under the scheme, for example by amending their tax return.

This change will cut the maximum penalty rate for non-compliance with the follower notice from 50% to 30% of the disputed tax. It will at the same time introduce an additional penalty of 20% for those taxpayers who the tribunal decides acted unreasonably in continuing to litigate against HMRC’s decision.

This change was first announced in December, and a consultation was held, which concluded in January.

Our comment

This change to penalty rates means that those in dispute with HMRC over a previously-defeated tax avoidance scheme have an incentive to settle the matter without themselves going to court. This is a practical measure to assist HMRC, as litigation is expensive and takes up the time of experienced staff.

When will it apply?

From the date of Royal Assent to the Finance Bill 2021.

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DISCLAIMER
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.

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