3. Taxation changes
Many of the tax changes announced are for a fixed period, generally, from April 2021 to April 2026. This does provide welcome certainty for businesses. Announcements made include:
Income Tax 2021-22 to 2025-26
The basic rate threshold is increasing to £37,700 for 2021-22 (2020-21: £37,500) and then frozen until April 2026. For the same period, the personal tax allowance is set at £12,570 (2020-21: £12,500) and will apply to all regions of the UK.
Taxpayers who will benefit from annual increases in their earnings up to April 2026 may find themselves paying tax at the higher rates if these increases breach the £37,700 annual basic rate limit.
Regional variations to Income Tax rates apply in Scotland and may apply in Wales.
NIC Upper Earnings limits and Upper Profits limits will also remain at a fixed amount until April 2026 and will be based on the Income Tax higher rate threshold of £50,270.
Starting rate for savings
The band of savings income that is subject to the 0% starting rate will remain at £5,000 for 2021-22.
Lifetime Allowance for pension pots
From April 2021 to April 2026 the pensions lifetime allowance will be frozen at £1,073,100.
Cycle to work scheme change
The government will legislate in Finance Bill 2021 to introduce a time-limited easement to the employer-provided cycle exemption to disapply the condition which states that employer-provided cycles must be used mainly for journeys to, from, or during work. The easement will be available to employees who have joined a scheme and have been provided with a cycle or cycling equipment on or before 20 December 2020.
The change will have effect on and after Royal Assent of Finance Bill 2021 and be in place until 5 April 2022, after which the normal rules of the exemption will apply.
Van benefits for zero carbon emissions
The government will legislate in Finance Bill 2021 to reduce the van benefit charge to zero for vans that produce zero carbon emissions. The change will have effect on and after 6 April 2021.
Capital Gains Tax
Any attempt to align CGT rates with Income Tax rates seems to be off the table for the time being. Apart from anti-avoidance changes, the only announcement on this tax that has general relevance is capping the annual exempt amount. This will be fixed at £12,300 from April 2021 to April 2026 for individuals, personal representatives and some types of trusts for disabled people; and £6,150 for trustees of most settlements.
As expected, there will be increases in Corporation Tax, but not yet and only for larger companies. Company owners will be relieved that there are no imminent increases in CT rates until April 2023.
From 1 April 2023, there will be two rates of CT.
- Taxable profits up £50,000 will continue to be taxed at 19% under the new Small Business Profits Rate
- Taxable profits in excess of £250,000 will be taxed at 25%
- Profits between £50,000 and £250,000 will be subject to a marginal tapering relief. This would be reduced for the number of associated companies and for short accounting periods.
Carry back of trading losses
The present provisions that restrict the carry back of tax losses is being relaxed, temporarily, extending the period over which incorporated and unincorporated businesses may carry-back trading losses from one year to three years.
This extension will apply to a maximum £2,000,000 of unused trading losses made in each of the tax years 2020-21 and 2021-22 by unincorporated businesses. The £2,000,000 maximum applies separately to unused trading losses made by incorporated companies, after carry-back to the preceding year, in relevant accounting periods ending between 1 April 2020 and 31 March 2021 and a separate maximum of £2,000,000 for periods ending between 1 April 2021 and 31 March 2022.
The £2,000,000 cap will be subject to a group-level limit, requiring groups with companies that have capacity to carry back losses in excess of £200,000 to apportion the cap between its companies. Further detail on the group limit will be published in due course.
R&D tax credit cap to be introduced
For accounting periods beginning on or after 1 April 2021, the amount of SME payable R&D tax credit that a company can receive in any one year will be capped at £20,000 plus three times the company’s total PAYE and National Insurance Contributions liability, in order to deter abuse.
Enterprise Management Incentives
As announced on 21 July 2020, the government will legislate in Finance Bill 2021 to extend the time-limited exception that ensures that employees who are furloughed or working reduced hours because of coronavirus (COVID-19) continue to meet the working time requirements for EMI schemes.
The change will apply to existing participants of EMI schemes and it also allows employers to issue new EMI options to employees who do not meet the working time requirement as a result of COVID-19. This measure will have effect until 5 April 2022.
Major new investment reliefs
A new “super-deduction” and a 50% first year allowance are to be introduced that will allow businesses to increase the tax relief they can claim for qualifying investments in plant and other equipment. It will apply to expenditure between 1 April 2021 and 31 March 2023.
The super-deduction will mean that assets will qualify for tax relief based on 130% of the actual cost of expenditure incurred.
Assets that qualify for the special rate relief will qualify for the 50% first year allowance.
The existing Annual Investment Allowance £1m limit will continue to be available until 31 December 2021.
In an attempt to reposition the UK as a global player a raft of tax incentives are to be provided to the eight freeport locations in England announced in the Budget. They will include enhanced structures and buildings allowances.
No changes in the present rates and allowances that are all frozen at current levels until April 2026.
This means the nil-rate band will be £325,000 and the residence nil-rate band at £175,000 for this period.
There be no changes to the standard 20% rate.
The £85,000 registration limit and the £83,000 deregistration limit will be frozen until 31 March 2024.