Given the governments manifesto pledge not to raise the rates of income tax, national insurance contributions and VAT and with the UK in the midst of a recession and severe lockdown restrictions, the Chancellor has little room for manoeuvre before he delivers his second Budget speech on 3rd March 2021. However, with the deficit currently so high, it is inevitable some measures will need to be taken, but what does this mean for your personal finances? Here is what we believe might be in store:
Corporation tax
The Chancellor could be heading for a further clash with directors of limited companies, most of whom are excluded from coronavirus support. Sunak is believed to be considering raising the UK’s main rate of corporation tax from 19% to possibly as high as 24%.
Proportional property tax
With the stamp duty land tax holiday due to expire on 31 March 2021, campaigners hoping for an extension look set for disappointment.
Speculation is growing that Sunak could use his Spring Budget to abolish stamp duty and council tax and replace it with a new property tax. This might arrive in the form of a proportional property tax – a 0.48% levy homeowners would have to pay each year on the value of their property. For those owning more than one residential property, such as landlords, the tax would apply on each property they own.
Capital Gains Tax
Back in the autumn, the Office for Tax Simplification (OTS) published a report recommending significant changes to capital gains tax.
The OTS said harmonising capital gains tax rates with income tax rates could raise an extra £14 billion a year for the Treasury.
Should the Treasury adopt this measure, people who own second homes or assets not held in tax-free wrappers would pick up most of the bill.
Other proposals include slashing the £12,300 annual capital gains tax-free allowance and replacing it so that it only covers asset price increases that are equivalent to inflation.
Income tax thresholds
In the most recent Spending Review was an increase to the personal allowance and the higher-rate threshold. This will be in line with the September Consumer Prices Index (CPI) figure of 0.5%. That should ensure the personal allowance rises to around £12,562, although the Treasury is likely to round that up to £12,570. Above that threshold, the basic rate of income tax will be charged at 20% on income of up to around £50,250 in 2021/22.
The September 2020 CPI figure will also determine the 2021/22 National Insurance limits and thresholds, plus Class 2 and Class 3 contributions.
Pensions.
Tax relief on pension contributions for higher rate taxpayers
Further reductions to tax relief on pension contributions are likely as a means of raising revenue and resolving perceived unfairness in the system. The Chancellor could address this in a number of ways, including reducing the annual and lifetime allowances and limiting carry-forward of unused annual allowances, but the simplest would be to apply a single flat rate of relief, perhaps set at the level of basic rate income tax.
Tax relief on pension contributions for non-taxpayers
The Conservative Party election manifesto promised to fix a ‘loophole’ whereby certain non-taxpayers (i.e. employees earning between £10,000 and just above the £12,500 personal income tax allowance) saving into ‘net pay pension schemes’ do not receive tax relief on pension contributions (including those required by auto-enrolment), making their pension savings up to 25 per cent more expensive when compared to similar workers contributing to ‘relief at source’ pension schemes. An HMRC consultation seeking to address this issue, ‘Pensions tax relief administration: call for evidence’, closed in October 2020 and it is expected that proposals will be announced to address the issue.
Dividends vs Salary for business owners.
Potential changes that may be covered in the next budget include keeping the Dividend Allowance but make Dividends subject to NIC for shareholders in close companies and bring dividend rates in line with Income Tax rates
R&D Tax Relief.
Extend definition of R&D for tax purposes
Incentives for expenditure on qualifying research and development (R&D) are among the most widely used and valuable corporation tax reliefs in the UK and, following a pledge in the Conservatives’ 2019 election manifesto, a consultation has been conducted on expanding the scope of the regimes to provide additional tax relief for in particular, R&D-related data and cloud computing costs. We expect the Chancellor to announce that the Government intends to proceed with this proposal.
Preventing abuse of the R&D tax relief for SMEs
The Government has consulted on, and published draft legislation in relation to, measures that would cap the payable credit that companies may receive under the R&D tax relief regime for small and medium-sized enterprises (SMEs). The proposed cap is to be based on the amounts of income tax and National Insurance contributions for which the company is required to account to HMRC under PAYE. The measures are intended to help HMRC to combat abuse by companies claiming R&D tax relief in the UK even though their R&D (if any) is not substantively linked to the UK. Based on the draft legislation, the cap will not affect claims to a payable credit worth less than £20,000, and there will be an exception to the cap for certain companies that have employees creating, preparing to create, or managing intellectual property. The Chancellor will confirm that these measures will apply from 1 April 2021.
How can we help?
Finch & Associates act for a wide variety of individuals and businesses, and we have experience in providing tailored advice to suit your needs. Our expertise and depth of knowledge will ensure that you have peace of mind that your tax affairs are all in order. Please call the team on 01275 867350 or send us a message now.