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Budget 2021 – Tricky For Rishi

Tax Tips

Budget 2021 Blog – a tricky path for the Chancellor to navigate

 

We’ve prepared a download which you can find at the end of this blog (for the impatient amongst us) but this is our take on Budget 2021.

“You can do whatever you want” was the remit from his own political party for this Budget. Whatever you want, to sort out this financial mess.

But, remember that we made a pledge in our manifesto to not increase income tax, national insurance or VAT. So, anything but those things…..

And our core vote aren’t too keen on changing capital gains tax or inheritance tax. So, anything but those things too…..

Oh, and small businesses are having a tough time too, so leave them out of it if you can.

What it left was therefore quite restrictive.

The plan to 2026 is to get the country back to a positive position. Not bells, whistles and fireworks. Just not a catastrophe.

Our summary of the budget shows that it hinges on 3 parts:

1. Corporation Tax – main changes

From 1 April 2023, there will be changes to the Corporation Tax rates.

  • Under £50k, profits will be taxed in full at 19%
  • Over £250k, profits will be taxed in full at 25%
  • And then there’s a “marginal rate” in between……at 26.5% – I know, not really highlighted in the announcements but it exists – all down to maths and the “effective sliding scale” between the two rates (I could bore you but I won’t!)

For example, profits of £60k will be taxed as follows:

  • £50k @ 19% – £9,500
  • £10k @ 26.5% – £2,650
  • Total tax – £12,150 – effective tax rate of 20.25%

The last time we had a “small” and “main” rate of Corporation Tax, the small rate was effective up to profits of £300k. This covered the majority of small businesses and by bringing the small rate in at profits of £50k, many more businesses need to consider the impact this change will have.

The key point here is that every £1 of extra profit earned above £50k (up to £250k), will be taxed at 26.5%. Naturally this is going to bring a new level of tax planning measures and considerations into play for many small businesses.

2. Recouping money paid out

It is estimated by the Treasury that one-third of the support handed out in the form of the SEISS grants and furlough payments shouldn’t have been paid out.  ONE THIRD!

There have already been over 15k phone calls from the general public tipping off HMRC and a further 40k employees reporting their employers on potentially fraudulent claims!

The message is this – it’s not going to be too hard for HMRC to start to work through these overclaims. They have the data and the starting point. Coupled with HMRC being “properly funded” from this Budget and the fact that HMRC will be requesting agent co-operation/confirmation on this – it’s a huge part of how the Government are planning to raise revenue.

There’ll be a further update going out in the next few weeks all about being prepared for this.

3. Fiscal drag

No, it’s not a new act on Ru Paul’s Drag Race (see Netflix for details).

The personal allowance has been increased from £12,500 in 2020/21 to £12,570 in 2021/22.

Similarly, the higher rate tax threshold has been increased from £50,000 in 2020/21 to £50,270 in 2021/22.

And then, that’s it.  They’re fixed until the end of the 2025/26 tax year. And this is where fiscal drag comes in.

What fiscal drag does is, by keeping the thresholds static, whilst wages rise due to inflation, this brings more people into tax by taxing people who wouldn’t have otherwise been taxed at the lower end, and also pushing people into higher rate tax who would otherwise have been taxed at the basic rate.

But that’s not the only thing to have been frozen – there’s also:

  • National Insurance thresholds
  • Dividend allowance
  • Savings allowance
  • Child Benefit clawback threshold
  • Pension annual allowance
  • Pension lifetime allowance
  • Capital gains tax annual allowance
  • Inheritance tax threshold
  • And a few more obscure ones all of which contribute to “fiscal drag”

Furthermore, the “Red Book” – the detailed breakdown of the Budget, which shows where the tax impact of the changes will be seen – shows that the Chancellor anticipates £10bn of additional tax will be raise from Capital Gains Tax and Inheritance Tax alone over the next 5 years. How, if the rates aren’t going up? Simply, the detail highlights that the Government are banking on an explosion in property prices to fuel the increased tax take.

And if this explosion doesn’t happen, then this will need to balanced up by either increasing CGT and IHT rates or removing relief (or a combination of both) accordingly.  It’ll be interesting to see how this all develops so we can be on the front foot if big changes are looming in the next few years – remember, IHT affects us all (we all die, eventually!) and CGT impacts on almost all businesses and also on individuals with investment assets.

Final comments

We’ve prepared a download of the main Budget points which you can see here.

There’ll no doubt be interesting times ahead. If the three point plan doesn’t come off (and it is ambitious!) then we would expect there to be further changes to balance things up.