On Wednesday, October 27th, Rishi Sunak presented his third Budget to Parliament as Chancellor of the Exchequer.
On October 27th, Chancellor Rishi Sunak presented his Budget 2021 address to the House of Commons, outlining a fiscal strategy aimed at preparing the UK for a “age of optimism” in the post-Covid-19 economy. Nonetheless, Mr. Sunak expressed concern that this Budget did not draw a line under Covid-19, recognizing challenges such as rising inflation and living costs.
Despite this cautious tone, the Office for Budget Responsibility revealed that economic growth in 2021 has been revised up from 4% to 6.5 %, with a further 6% increase expected in 2022. Meanwhile, the national unemployment rate is expected to peak at just 5.2 percent.
With the recent news that corporation tax would rise in April 2023, the freezing of personal tax levels, and the implementation of the new Health and Social Care Levy, many company owners may be relieved that large extra tax hikes were not revealed. The Chancellor also remained mute on proposed tax system adjustments such as capital gains tax, inheritance tax, pension relief, and work taxes.
Continue reading to learn about the important Budget 2021 measures affecting the UK’s army of small companies and self-employed people.
What was said before to the Budget?
National Insurance Contributions are projected to rise.
The Prime Minister, Boris Johnson, announced the Health and Social Care Levy in September, and it will apply to workers and employers responsible for Class 1 NIC, as well as self-employed persons liable for Class 4 NIC. It will be available beginning in April 2022.
The typical basic-rate employee earning £20,000 per year will contribute an extra £130 per year. Meanwhile, a typical higher-rate employee earning £80,000 would pay an additional £880 per year.
It is vital to highlight that the NIC rise will also affect employers, who will be required to pay an extra 1.25 percent in employer NIC beginning in April 2022.
Employers will be required to pay the levy for workers earning more than the Secondary Threshold of National Insurance, which in 2021-22 is £8,840. Existing reliefs will be extended to employers of apprentices under the age of 25, all workers under the age of 21, veterans, and new employees in freeports beginning in April 2022.
Employers who qualify for the Employment Allowance may lower their NIC bill by up to £4,000 per year. According to the government, 40% of small company owners will pay no additional employer NIC.
Dividend taxes will be raised beginning in April.
Individuals who receive dividend income will also face a higher tax cost, as all dividend tax rates will rise by 1.25 percent beginning in April 2022.
Dividend tax is levied on dividend income that exceeds the fixed £2,000 dividend limit and the £12,570 personal allowance. Dividends on assets kept in ISAs are exempt from dividend taxation.
The base rate dividend tax will be 8.75 percent beginning with the 2022-23 tax year, up from 7.5 percent in 2021/22. Higher rate dividend taxpayers will be taxed 33.75 percent rather than 32.5 percent, and extra rate dividend taxpayers will be charged 39.35 percent rather than 38.1 percent.
What announcements did the Chancellor make on the day of the Autumn Budget that impact company owners and self-employed people?
Reforms to the Research and Development Tax Credit
The Chancellor announced adjustments to research and development tax credit relief that will take effect in April 2023, refocusing the benefit on UK-based enterprises. More information is available here.
The National Living Wage is expected to climb.
The National Living Wage will increase by 6.6 percent to £9.50 per hour on April 1, 2022. The National Minimum Wage will also be raised for young workers and apprentices.
Reforms to the basis period and Making Tax Digital
The complicated base period regulations for self-employed individuals will be modified such that business profit for a tax year will be the profit or loss originating in the tax year itself, independent of the accounting date. Because many sole proprietors will already be preparing accounts to be synchronized with the end of the tax year, this move will only affect a tiny fraction of the self-employed. The transition to the new standards will occur in 2023-24, with the new rules taking effect on April 6, 2024.
These modifications are being made to facilitate the transition to a digital tax system. The government had previously indicated that single businesses and landlords with incomes of more than £10,000 would be given one additional year to prepare for Making Tax Digital. Making Tax Digital for income tax will now be implemented on April 6, 2024.
For partnerships, the situation is somewhat different. Making Tax Digital laws will apply to general partnerships with only persons as partners beginning in April 2025. All other partnerships (such as Limited Liability Partnerships or partnerships with corporate partners) will be required to join Making Tax Digital at a later date that has yet to be determined.
The Annual Investment Allowance (AIA) has been expanded.
The government confirmed that the temporary AIA limit of £1 million on qualified equipment and machinery, which was set to expire on December 31, 2021, has been extended until March 31, 2023. This matches the timeframe for claiming AIA with the current timeframe for the 130 percent super-deduction, therefore it is likely to be of modest use to the vast majority of UK businesses who are already eligible to the 130 percent super deduction for the same period.
Recovery Loan Scheme has been extended.
The Chancellor said that the Recovery Loan Scheme, which is available to enterprises wishing to exit the Covid-19 lockdowns, will be extended until June 30th, 2022.
The following changes will take effect on January 1, 2022:
The plan will only be available to small and medium-sized businesses.
The maximum amount of credit accessible per firm will be £2 million.
The guarantee coverage provided by the government to lenders would be decreased to 70%.
All funding applications submitted after January 1, 2022 will be subject to the aforementioned adjustments.
More information on the Recovery Loan Scheme may be found here.
Reformed business rates
To lower the cost of business rates in England, encourage investment, and improve the system’s responsiveness, the Government will:
From 1 April 2022 to 31 March 2023, the business rates multiplier will be frozen for a second year, remaining at 49.9p and 51.2p.
For 2022-23, a new temporary business rates relief for qualified retail, hotel, and leisure facilities will be implemented. Eligible premises will get 50% relief, up to a maximum of £110,000 per firm.
Implement a 100% improvement alleviation for business rates. This would give occupiers with a 12-month reprieve from increased costs if approved upgrades to an existing home boost the rateable value. The government will hold a consultation to determine the best way to deliver this relief, which will go into effect in 2023 and be revisited in 2028.
introduce from April 1, 2023 to March 31, 2035 To aid in the decarbonisation of non-domestic buildings, targeted business rate exemptions for qualified equipment and machinery employed in onsite renewable energy production and storage, as well as a 100 percent relief for eligible heat networks, are being implemented.
Starting in 2023, the frequency of business rate revaluations will be increased to every three years rather than every five years.
Transitional assistance for small and medium-sized firms, as well as the assisting small business initiative, will be extended for one year. Subject to subsidy control restrictions, this will limit rises to 15% for small houses (up to a rateable value of £20,000 or £28,000 in Greater London) and 25% for larger properties (up to a rateable value of £100,000).
More information about this change may be found here.
Increased Capital Gains Tax (CGT) payment and report window for landlords and second house owners
The deadline to declare and pay CGT after selling a UK residential property will rise from 30 days to 60 days following the completion date on October 27, 2021.
The same extended deadline will apply to non-UK residents selling property in the UK.
This much-needed relief will make things simpler for UK citizens who owe tax on the sale of a UK residential property. Previously, the deadline for completing a CGT report and paying the tax was 30 days from the date of completion of the transaction, which presented complications.
Non-UK residents are obliged to file a return regardless of whether any tax is owed on all forms of property disposals, thus they will benefit from the longer filing time.
Pension supplementation for low-wage employees
The Government has proposed future adjustments to the ‘Net Pay’ pension program rules, which will result in a pension top-up for low-income workers.
Currently, ‘Net Pay’ pension plans entail that workers save tax at their marginal rates, which might be 20%, 40%, or 45%. For low-income individuals, this means that they get no tax relief on their donations, but if they had made them privately via a ‘Relief at Source’ program, they would have earned a 25% top-up on their net contribution.
In its 2019 manifesto, the Government vowed to remedy the issue, and measures released today indicate that individuals impacted in 2024/25 would likely obtain top-ups in 2025/26.
While no specific assurances were made about sustained tax reduction on pension contributions, the good news is that no big changes seem to be anticipated in the near or medium term.
The increase in fuel duty for 2022/2023 has been canceled.
This anticipated action ensures that fuel tax will remain at 57.95p per litre, avoiding a proposed 2.8p per litre hike that would cost the Treasury £1.5 billion.
According to the government, the ongoing fuel tax freeze has saved the typical UK motorist £1,900.
Many organizations have lobbied for another fuel duty freeze, and with the price of a barrel of oil continuing to climb, further gasoline price rises are expected in the coming weeks.