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Tax update – March 2021

Thresholds and allowances frozen until April 2026

To help meet some of the costs of the COVID-19 pandemic, the Chancellor has opted to freeze various allowances and thresholds until April 2026, rather than increase the rates of income tax and capital gains tax. As incomes rise over the period, more people will pay tax, and more people will pay tax at the higher and the additional rates.

Personal allowance and basic rate band

The personal allowance is increased to £12,570 for 2021/22, from £12,500 for 2020/21. It will remain at this level for all tax years up to and including 2025/26. The allowance is reduced by £1 for every £2 by which income exceeds £100,000. As a result, for the tax years 2021/22 to 2025/26 inclusive, anyone with income in excess of £125,140 will not receive a personal allowance.

The basic rate band is increased to £37,700 for 2021/22, from £35,500 for 2020/21. As a result, the point at which taxpayers in receipt of the standard personal allowance start to pay higher rate tax is increased to £50,270 for 2021/22, from £50,000 for 2020/21. It will remain at £50,270 for future tax years up to and including 2025/26.

Capital gains tax annual exempt amount

Individuals are allowed to realise net chargeable gains up to the level of the annual exempt amount for each tax year before a liability to capital gains tax arises. The capital gains tax annual exempt amount remains at £12,300 for 2021/22, and will stay at this level for the following four tax years.

National Insurance thresholds

The upper earnings limit for Class 1 National Insurance contributions and the upper profits limits for Class 4 National Insurance contributions are aligned with the level at which higher rate tax become payable. This ensures that once a person starts to pay tax at the higher rate, the rate at which they pay National Insurance drops to the additional rate of 2%, so that they do not pay both higher rate tax and main rate National Insurance contributions on the same income. For 2021/22, the upper earnings limit for Class 1 National Insurance contributions and the upper profits limit for Class 4 National Insurance contributions are set at £50,270. As the higher rate threshold is frozen at this level until April 2026, both the upper earnings limit and the upper profits limit will remain at £50,270 for all tax years up to and including 2025/26.

Inheritance tax nil rate bands

No inheritance tax is payable unless the value of the deceased’s estate exceeds the nil rate band. This has been frozen at £325,000 since 2008/09. It was due to be reviewed in 2021. However, at the time of the 2021 Budget, the Chancellor announced that the nil rate band would remain at £325,000 for another five years, for 2021/22 to 2025/66 inclusive.

A further nil rate band – the residence nil rate band (RNRB) – is available where the main residence is left to a direct descendant, such as a child or a grandchild. The RNRB remains at its 2020/21 level of £175,000 for 2021/22. It too is frozen at this level until April 2026.

The freezing of the nil rate bands will bring more estates within the charge to inheritance tax. Planning ahead and making more lifetime transfers could reduce the eventual liability on the estate at death.

Pension lifetime allowance

The pension lifetime allowance places a cap on the value of tax-relieved pension savings. The lifetime allowance remains at its 2020/21 level of £1,073,100 for 2021/22 and for the following four tax years. If the value of your pension savings is nearing this level, it is important that you review your pension pot before making further tax-relieved contributions in any of the years from 2021/22 to 2025/26 inclusive.

Where tax-relieved pension savings exceed the lifetime allowance, tax relief is clawed back at the rate of 25% where the excess is taken as a pension, and at the rate of 55% where the excess is taken as a lump sum.

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Speak to us to understand what the freezing of the allowances and thresholds will mean to you, and what action you can take to mitigate the effects.

CJRS extended until 30 September 2021

The Coronavirus Job Retention Scheme (CJRS) has provided a lifeline for many employers and employees during the COVID-19 pandemic. The scheme was due to come to an end on 30 April 2021. However, at the time of the 2021 Budget, the Chancellor, Rishi Sunak, announced that the scheme would, once again, be extended. It will now run until 30 September 2021.

Nature of the scheme

The CJRS allows employers to furlough or flexibly furlough employees, and to claim a grant for the usual hours that they do not work. The employee receives 80% of their normal pay for their unworked hours, subject to a cap equivalent to £2,500 a month. The employer can claim some or all of this amount, depending on the month to which the claim relates. Where an employee is flexibly furloughed, the employer must pay the employee for the hours that they work at their usual rate.

Final phase of the scheme

The final phase of the scheme runs from 1 May 2021 to 30 September 2021. The amount that the employer can claim under the scheme remains unchanged for May and June, but reduces from July onwards once lockdown restrictions are lifted. Guidance on changes to the scheme from July can be found on the Gov.uk website.

Grant claims – May and June 2021

For May and June 2021, employers can continue to claim 80% of the employee’s pay for their unworked hours, up to the monthly cap of £2,500 (reduced proportionately where the employee is not fully furloughed for the full month). The employee must continue to be paid in full for any hours that they work, and also 80% of their pay up to the level of the cap for any usual hours that are unworked in the month.

Grant claim – July 2021

From July onwards, the employer is required to contribute to the payments made to furloughed and flexibly furloughed employees for their unworked hours.

For July 2021, the amount that the employer can claim under the CJRS for the employee’s unworked hours is reduced to 70% of their usual pay for those hours, subject to a cap of £2,187.50 per month (reduced proportionately where the employee is not fully furloughed for the full month). However, the employee will continue to receive 80% of their usual pay for their unworked hours, subject to the monthly cap of £2,500. This means that the employer must make up the difference of 10% (capped at £312.50 per month) between the amount claimed under the CJRS and the amount paid to the employee.

Grant claims – August and September 2021

The amount that the employer can claim is further reduced in the final two months of the scheme. For August and September 2021, the employer can claim a grant of 60% of the employee’s usual pay for their unworked hours, subject to a cap of £1,875 per month (proportionately reduced where the employee is not fully furloughed for the full month).

The employer must continue to pay the employee 80% of their usual pay for their unworked hours. Consequently, the employer must top up the grant claimed from the Government, contributing 20% of the employee’s usual pay for their unworked hours (up to £625 per month).

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We can help you work out what support you can claim for your employees as lockdown restrictions are eased and the CJRS is wound down.

Further grants available under the SEISS

The Self-Employment Income Support Scheme (SEISS) provides grant support to eligible self-employed taxpayers who have been adversely affected by the COVID-19 pandemic. A further two grants are to be paid under the scheme. In addition, the scheme has been expanded to include those who commenced self-employment in 2019/20. Guidance on the grants can be found on the Gov.uk website.

Fourth grant

The fourth grant covers February, March and April 2021 and is worth 80% of average profits for three months, capped at £7,500. The grant can be claimed from late April 2021, and will be paid in a single instalment. The claim window will run until 31 May 2021.

A trader will be eligible to claim if they have been adversely affected by the COVID-19 pandemic. This test will be met if the trader is currently trading but has suffered reduced demand as a result of the pandemic, or if they have been trading but are unable to do so temporarily due to Coronavirus. Suffering additional costs where demand has not fallen does not qualify the trader for the grant.

As previously, a trader can only benefit from the scheme if their trading profits are no more than £50,000 and comprise at least 50% of the trader’s total income. HMRC will look first at the trader’s profits as returned on their tax return for 2019/20. Where these are more than £50,000, HMRC will look at average profits over 2016/17 to 2019/20. The rules are modified if the trader did not trade in all of those years.

Fifth grant

The fifth and final grant covers the period from May to September 2021. Unlike the previous grants, the amount of the fifth grant depends on the extent to which turnover has fallen as a result of the COVID-19 pandemic. Traders will be able to claim the fifth grant from late July.

Turnover has fallen by at least 30%

Where the trader’s turnover has fallen as a result of the COVID-19 pandemic by at least 30%, the fifth grant will be worth 80% of three months’ average profits capped at £7,500.

Turnover has fallen by less than 30%

Traders who have been less severely affected by the pandemic will receive a lower grant. Where turnover has fallen by less than 30%, the fifth grant will be worth 30% of three months’ average trading profits, capped at £2,850.

The Government will publish further details on the fifth grant in due course.

Newly self-employed

When initially launched, the scheme was only available to traders who had filed their 2018/19 self-assessment tax return by 23 April 2020. However, as the deadline for filing the 2019/20 tax return has now passed, taxpayers who commenced self-employment in 2019/20 are able to claim the fourth and fifth grants, as long as they meet the usual eligibility criteria and they traded in both 2019/20 and 2020/21 and submitted their 2019/20 tax return by midnight on 2 March 2021.

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Contact us to find out whether you are eligible for the fourth and fifth grants under the SEISS, and what the grant is worth to you.

New capital allowances super-deduction

Companies within the charge to corporation tax who invest in new plant and machinery in the two years from 1 April 2021 are able to benefit from two new first-year allowances, including a super-deduction of 130%. Details of the measure are set out in a policy paper published by the Government.

The super-deduction

Companies that invest in plant and machinery that would otherwise qualify for main rate capital allowances between 1 April 2021 and 31 March 2023 can claim a super-deduction of 130%. The deduction is in the form of a first-year capital allowance. However, it is not available for expenditure for which the claiming of a first-year allowance is excluded by the legislation. The list of exclusions includes expenditure on cars (although a 100% first-year allowance is available separately for zero-emission cars) and expenditure on plant and machinery for leasing. First-year allowances cannot be claimed for the accounting period in which the trade is permanently discontinued.

Impact of the super-deduction

Where the super-deduction is claimed, the company will receive a deduction when computing profits of £1.30 for every £1 that they spend on qualifying plant and machinery. This provides tax relief at the rate of 24.7% (19% x 130%).

Accounting periods spanning 1 April 2023

The super-deduction is available at the rate of 130% where the expenditure is incurred between 1 April 2021 and 31 March 2023. However, the rate of deduction is reduced where the accounting period spans 1 April 2023.

Where expenditure is incurred in a period that straddles 1 April 2023 and is incurred prior to that date, the rate of deduction is given at the ‘relevant percentage’. This is found by dividing the number of days in the period prior to 1 April 2023 by the total number of days in the accounting period, multiplying this by 30 and adding it to 100. For example, if the accounting period is the year to 31 December 2023, the relevant percentage for qualifying expenditure incurred prior to 1 April 2023 is 107.4% ((90/365 x 30) + 100).

A deduction is available at the rate of 100% for qualifying expenditure incurred on or after 1 April 2023 in an accounting period that straddles 1 April 2023.

Balancing charge

If an asset which has benefited from the super-deduction is sold, relief is clawed back by treating the disposal proceeds as a balancing charge, rather than allocating them to the relevant pool. If the disposal event occurs in an accounting period that ends before 1 April 2023, the balancing charge is found by multiplying the disposal proceeds by 1.3.

If the disposal event takes place in an accounting period that spans 1 April 2023, the disposal proceeds are multiplied by the ’relevant factor’ to arrive at the balancing charge. This is found by dividing the number of days in the period prior to 1 April 2023 by the total number of days in the accounting period, multiplying this by 0.3 and adding it to 1.

In all other cases, the balancing charge is equal to the disposal proceeds.

The SR allowance

A second new first-year allowance – the SR allowance – is introduced for qualifying expenditure by companies on assets that would otherwise qualify for capital allowances at the special rate of 6% where the expenditure is incurred between 1 April 2021 and 31 March 2023. The allowance is given at the rate of 50%. Assets falling into this category include long-life assets, thermal insulation and expenditure on integral features. As with the super-deduction, expenditure on cars does not qualify for the SR allowance.

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Speak to us to discuss how you can benefit from the new first-year allowances and other available capital allowances.

Corporation tax increase from April 2023

The main rate of corporation tax is due to increase to 25% for the financial year 2023, starting on 1 April 2023. However, companies with profits of £50,000 or less will continue to pay corporation tax at the current rate of 19%. Companies whose taxable profits fall between £50,000 and £250,000 will pay corporation tax at the main rate of 25%, but will receive marginal relief which will reduce the effective rate of tax that they pay. Details of the proposed changes can be found in a policy paper published by the Government.

The rate of corporation tax will remain at 19% for the financial year 2022, starting on 1 April 2022.

Small companies’ rate from 1 April 2023

A small companies’ rate of 19% will apply from 1 April 2023 to companies with taxable profits of £50,000 or less. This limit is reduced if the company has associated companies or if the accounting period is less than 12 months.

Marginal relief from 1 April 2023

Companies whose profits fall between the lower profit limit, set at £50,000, and the upper profits limit, set at £250,000, are able to claim marginal relief. This will provide a bridge between the small companies’ rate of 19%, applying to companies with profits of £50,000 or less, and the main rate of 25%, applying to companies with profits of £250,000 or more. The effective rate of corporation tax on profits falling between these two limits will increase gradually. The limits are reduced to reflect the number of associated companies that a company has, for example, being divided by 2 where a company has one associated company. The limits are also proportionately reduced where the accounting period is less than 12 months.

The marginal relief fraction is set at 3/200. The amount of marginal relief is found by multiplying the fraction by the difference between the company’s profits and the upper profits limit of £250,000. For example, if a company has taxable profits of £100,000, they would be entitled to marginal relief of £2,250 (3/200 x (£250,000 – £100,000)).

The calculation is modified if the company has franked investment income.

Where a company’s profits fall between the lower and upper profits limits, their corporation tax liability is found by multiplying their profits by the main rate of 25% and deducting marginal relief. Thus, a company with profits of £100,000 for the year to 31 March 2024 would pay corporation tax of £22,750 ((£100,000 @ 25%) – £2,250). This gives an effective rate of corporation tax of 22.75%.

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Contact us to find out what the increase in corporation tax will mean for your company and how to plan ahead for the change.