This Budget follows a year of extraordinary economic challenge as a result of the ongoing COVID-19 pandemic.
As the economy reopens, this Budget also set out the steps the Government is taking to support the recovery. The Chancellor said his immediate priority continues to be supporting those hardest hit, with extensions to furlough, self-employed support, business grants, loans and VAT cuts.
He also set out plans to drive jobs, growth and investment to help the economy rebound – and spoke about the tough choices required to put the public finances on a more sustainable path.
What does Budget 2021 mean for your future plans?
1. Personal Allowance frozen for 5 years
The tax-free Personal Allowance (PA) and Basic Rate Band (BRB) increase by a modest amount each year in line with the Consumer Price Index. For the tax year ending 5 April 2022, it had already been announced that these would increase to £12,570 and £37,700 respectively. The Chancellor confirmed these figures, but announced that the PA and BRB will now be maintained at these 2021/22 levels until 5 April 2026.
This means that for the tax years ending 5 April 2022 until 5 April 2026, an individual will be able to have an annual income of £12,570 before paying any tax, and will be taxed at the higher 40% rate (32.5% for dividends) once their income exceeds £50,270. The PA will continue to be reduced for those with incomes in excess of £100,000, and no change was announced to the 45% (38.1% for dividends) additional rate, which will continue to apply to annual incomes of more than £150,000.
In our view: While this policy decision will not reduce after-tax income, the Chancellor made clear that over the five year period this freeze will raise revenue by pushing more and more people into the higher rate tax brackets as their earnings and other income increase. But if you have spare cash it is still possible to reduce your tax liability by continuing, or increasing, pension payments, or by the use of other Government approved reliefs and allowances.
No change to the £40,000 annual limit that can be contributed into a pension, but the lifetime allowance limit will be frozen for 5 years at £1,073,100. The lifetime allowance is a limit on the amount that can be drawn from pension schemes – whether in lump sums or retirement income – and can be paid without triggering a tax charge.
In our view: Pension tax relief is received on contributions at your marginal rate (20%, 40% or 45%) and if you contribute via salary sacrifice this also saves national insurance at either 12% or 2%. This is still a very generous tax giveaway and an incentive to save for retirement. The current maximum pension value has now been capped at £1,073,100 until April 2026, but even if your fund eventually exceeds this value the Government may only be recovering part of the tax liability that was given to you when the pension contributions were made. The pension fund assets are still allowed to grow tax free, and on death the fund value is not chargeable to Inheritance Tax.
3. Green Savings Bond
NS&I will be offering a new bond later this Summer. It’s a new type of account that will allow UK savers to use their savings to help environmentally-focused projects get off the ground. This is all part of the Government’s efforts to hit net-zero carbon emissions by 2050. Projects include building offshore wind farms, accelerating the transition to electric vehicles and revamping homes and public transport. The Government, through NS&I, will pay you an interest rate in return for the use of your money over that period, and then it’ll pay your lump sum savings back in full, plus the interest, once the bond’s term is over.
In our view: This may be an appropriate investment for some personal or pension funds as part of a retirement strategy to manage access to cash flow (but with a Government guarantee on the loss of any capita) as well as holding a long term investment portfolio.
4. Capital gains tax and Inheritance Tax allowances frozen
The Chancellor said that the Capital Gains Tax Allowance and Inheritance Tax Threshold will increase in line with the consumer prices index in April 2021 but will then remain at this level until April 2026, cancelling planned increases in line with inflation.
In our view: Capital gains tax rates are still low and the reliefs and allowances provide plenty of advance planning that can be put in place to protect family finances.
5. Mortgage guarantee scheme
The government will compensate the mortgage lender for a portion of the net losses suffered in the event of a repossession. The guarantee will apply down to 80% of the purchase value of the guaranteed property Help to Grow Scheme. Lenders will also take a 5% share of net losses above this 80% threshold. This will help to ensure that lenders are not incentivised to originate poor quality loans. The guarantee will be valid for up to seven years after the mortgage is originated; evidence shows that loans are unlikely to default after such a period has elapsed.
In our view: It will help the younger generation get on the property ladder but the borrower still needs to pass the affordability test and have the prospects that their job is stable and long term. Politicians need to focus on getting stable long term jobs in place for 18-25 year olds.
1. Main corporation tax rate to rise to 25% from 1 April 2023
As the Government seeks to rebuild its finances after the COVID-19 pandemic, it has increased the main Corporation Tax rate to 25% from 1 April 2023 on profits over £250,000. The rate for profits under £50,000 will remain at 19%.
The return to lower and upper rates and a high marginal rate in between will add another layer of complexity to the process of forecasting tax payments. Whilst a relatively competitive rate compared to other G7 members, a main rate of 25% will be double the current 12.5% rate in Ireland.
In our view: If a business is looking to expand and needs to buy plant and machinery it now only costs the business 75p in every £1 because there is a greater tax incentive. Similarly companies can continue to contribute generous sums into pensions which will reduce taxable profits and hence save tax at a higher rate than it did last year. Larger companies will pay more tax and this may reduce dividends that are paid on quoted shareholdings as a result, but growth companies should make more profit so that means a greater after tax sum of cash despite the higher tax rate.
2. Trading Losses.
The extended relief will allow for a three year carry back of losses arising in 2020-21 and 2021-22. Currently losses in an ongoing business can only be carried back twelve months.
In our view: This will help company cash flow as we exit lockdown.
3. Capital Allowances
A “super-deduction” will be introduced from 1 April 2021 until 31 March 2023 allowing companies to benefit from a 130% first-year allowance for capital expenditure on qualifying new plant and machinery assets. This deduction will allow companies to potentially reduce tax payable by 25p for every £1 invested in eligible plant and machinery.
In our view: This measure will be welcomed by all companies looking to invest in plant and machinery during the periods outlined. However, it will be necessary to consider the detailed legislation to ensure the deductions will be available and that all the capital allowances now available are fully optimised in the relevant periods.
4. Business Recovery Loan scheme
The Recovery Loan Scheme ensures businesses of any size can continue to access loans and other kinds of finance up to £10 million per business once the existing COVID-19 loan schemes close, providing support as businesses recover and grow following the disruption of the pandemic and the end of the transition period. Once received, the finance can be used for any legitimate business purpose, including growth and investment. The Government guarantees 80% of the finance to the lender to ensure they continue to have the confidence to lend to businesses. The scheme launches on 6 April and is open until 31 December.
In our view: the support is to be welcomed but all businesses should consider monitoring monthly cash flow forecasts over a rolling 12 month period to establish any stress points. Debt can therefore be carefully managed over the long-term to help prevent business failure. In our view the Chancellor has provided additional access to finance to help all businesses manage their cash flow as they grow their business out of lockdown. Whilst certain sectors will have massive challenges, the debt burden will need to be carefully managed and businesses may need to diversify as consumers may have changed habits forever since the start of the pandemic.
Download Our Budget 2021 Guide
The Government has started to raise taxes because the pandemic borrowing will need to be paid back over generations, but the Government reliefs and allowances do allow you the opportunity to reduce your own tax burden to very low levels with ongoing planning as a family. Certain allowances have been capped, but a family of four have the opportunity to use the allowances four-fold so that parents, as they get older, could move funds from their pensions and other private assets into their children’s pensions and individual names so that you keep more of your own hard earned money.
As ever, what the Budget means for individuals and businesses will become clearer as more details of the specific policies are announced in the coming days and weeks. We look forward to sharing more details with you together with tax planning tips in future e-mails and face to face meetings.
We look forward to working with you as we all exit lockdown.