Given the focus in this Budget on tackling Coronavirus by protecting jobs and focussing on economic recovery, the tax changes for individuals were largely limited to freezing specific allowances and tax bands until 2026. We know that a number of consultation papers will be published later this month, however, so it is possible there may yet be further changes to come.
Starting with what was announced, the Government stuck with its manifesto pledge not to increase income tax, national insurance, or VAT, although they have announced a freezing of several allowances and exemptions:
- the income tax personal allowance and the basic rate limit will both increase with the Consumer Price Index from 6 April 2021, as previously committed to, but they will then be frozen until 5 April 2026, which will be after the next General Election;
- the capital gains annual exempt amount, which is £12,300 for individuals, will remain at its current level until 5 April 2026;
- the pensions lifetime allowance will remain at its current level of £1,073,100 until 5 April 2026; and
- the inheritance tax nil-rate band and residence nil-rate band thresholds will remain at £325,000 and £125,000 respectively until 5 April 2026. By 2026, the nil-rate band will have been frozen at £325,000 for 16 years.
These four changes are forecast to bring in £21.2 billion in additional taxes through to 2026, partly because more taxpayers will start exceeding their personal allowance or become higher rate taxpayers.
Focussing then on what wasn’t announced, there was mounting speculation in the run up to the Budget that the rate of capital gains tax could be increased, potentially being aligned with income tax rates. There was no mention of this in the Budget.
Other than an extension to the social investment tax relief scheme, there were also no changes announced to the tax reliefs available to individuals when they invest in businesses, including the Enterprise Investment Scheme, the Seed Enterprise Investment Scheme and the lesser known Investors’ Relief, thereby encouraging individuals to invest for growth.
Several of the announcements made in this Budget were very similar to the recommendations included in the Treasury Committee’s report on Tax after Coronavirus, published on 24 February 2021. That report’s recommendations included not raising tax rates now, freezing thresholds, a 3 year carry back for trading losses incurred in the pandemic, and increasing investment allowances for businesses. Those four measures were all introduced in this Budget.
In the past, Government consultation papers have often been released on Budget day, providing an insight into potential future tax changes. This year, the consultations are being released later, on 23 March. These consultations could point to the possibility of tax changes being announced later in an Autumn Statement, when the economy should be on a more even keel. It may be worth revisiting the recommendations in the Tax after Coronavirus report that weren’t included in this Budget for an indication of what further changes we might see. The Treasury Committee report noted that public finances are not on a sustainable trajectory, and that tax rises will be needed.
The Treasury report recommended:
- A full reform of pension tax relief, on the grounds that it is skewed to higher earners
- Stamp duty land tax reform
- A reform of capital taxes, referring to the Office of Tax Simplification reports on inheritance tax and capital gains tax
We have also had recent reports from the Institute for Fiscal Studies on the potential use of a wealth tax to deal with the cost of Coronavirus.
As expected, there was no mention of a wealth tax in this Budget, although it will be interesting to find out more about the direction of travel with tax policy when the consultations are released later this month. We may well see more fundamental changes to personal taxes in the not too distant future.
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.
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
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.
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
Capital gains tax annual exempt amount
The Government has announced that the capital gains tax (CGT) annual exempt amount (AEA) will remain at its current rate up to and including the 2025/26 tax year.
The AEA is the annual amount below which capital gains realised by an individual or by trustees in a particular tax year are not subject to CGT.
The AEA for the 2020/21 tax year is £12,300 for individuals and a maximum of £6,150 for trustees. It has now been announced that the AEA will remain at these levels up to and including the 2025/26 tax year.
Although there had been little advance warning of ‘freezing’ the AEA, in light of the widely anticipated decision to freeze the personal allowance and basic rate income tax bands, the announcement in relation to the AEA came as no surprise.
The implications of the decision will be far less wide-reaching than the possible CGT tax rate increases that had been speculated by some before the Budget. Freezing the AEA could be seen as a ‘stealth’ increase in CGT; however, it is likely to impact a much smaller number of taxpayers than the corresponding freezing of income tax thresholds.
When will it apply?
The AEA will be frozen at current levels until 5 April 2026.
Inheritance tax nil rate band and residence nil rate band frozen
The inheritance tax nil rate band and the residence nil rate band will remain at their current level up to and including the 2025/26 tax year.
The nil-rate band (NRB) threshold, above which inheritance tax becomes payable, will remain at £325,000 until April 2026. The residence nil-rate band (RNRB), which applies when taxpayers pass their main residence to their direct descendants on death, will also be kept at £175,000 for this period. The RNRB is reduced by £1 for every £2 that an estate exceeds £2 million in value and this £2 million threshold will also remain fixed until April 2026.
The combined effect of the NRB and RNRB means that, in some circumstances, an estate worth up to £1 million can be passed on, without any charge to inheritance tax, on the death of a surviving spouse or civil partner.
The decision to maintain the NRB and RNRB at their current levels could see more estates exceeding these thresholds if asset values continue to rise. This would result in more estates becoming liable to inheritance tax or ceasing to qualify for the RNRB.
The NRB has been set at £325,000 since 6 April 2009 and so it is not a surprise that there are no plans for this to rise in the coming five years. The RNRB was introduced in April 2017 and, though it offers welcome relief from inheritance tax for smaller estates, it is a poorly understood and an unnecessarily complicated relief.
It is disappointing that the Chancellor did not take this opportunity to merge the two bands together. Broader changes to the inheritance tax system may still be on the cards, with further HMRC consultation documents expected on 23 March.
When will it apply?
From 6 April 2021, the thresholds will remain frozen at their existing levels until 5 April 2026.
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.
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.
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.
Extension of the £1m Annual Investment Allowance limit
It has been confirmed that the temporary increase in the Annual Investment Allowance (AIA) for plant and machinery to £1m has been extended by a year. This limit will have effect from 1 January 2021 to 31 December 2021.
As announced in November 2020, the Government will legislate to extend the £1m AIA limit for a further year. The AIA limit was temporarily increased from £200,000 to £1m in January 2019 to stimulate business investment. This increase was originally intended to be for two years, but it has now been extended by a further 12 months to 31 December 2021.
The Government remains keen to encourage capital investment in the UK and this extension will be welcome news for many businesses investing in qualifying plant and machinery.
This extension allows businesses further time to plan their capital investment and maximise the 100% relief available for qualifying expenditure. It will be particularly valuable to sole traders, partnerships and LLPs, who cannot benefit from the new super-deduction introduced for companies.
When will it apply?
For expenditure incurred from 1 January 2021 to 31 December 2021