Since the increase in the employee's national insurance limit announced in the Spring Statement a new opportunity exists for contractors to save tax through a higher salary payment. Since this salary payment will give rise to national insurance it is recommended that the £2,808 differential is paid as a bonus in March 2023. This minimises the number of payments to be made to HMRC and postpones payments as far as possible. The tax saving of £387 is illustrated in the table below:
The threshold at which an employee becomes liable to National Insurance is called the Primary Threshold and at which a self-employed person becomes liable is known as the Lower Profits Limit. Both will increase to the same level as the personal allowance of £12,570 by July 2022. This is an increase of roughly £3,000, and will save an employee about £300 a year.
By way of recap, the primary NIC rate will increase to £9,880 from 6 April 2023 and to £23,570 on 6 July 2022.
The secondary or employers’ national insurance level will not change and the increase in rate of national insurance by 1.25% will still go ahead on 6 April. The government estimates that about 70% of taxpayers will benefit from the increase in thresholds even though the rate of NIC will increase.
Currently self-employed individuals currently become liable to Class 2 on making profits over the Small Profits Threshold (of £6,725 for 2022/23.) The threshold for paying Class 2 National Insurance is set to increase to the lower profits limit. Nonetheless, entitlement to social security benefits will continue accrue once profits reach the Small Profits Limit. Most significant among the benefits is the addition of a year towards the number required to secure a basic state pension. As a result a sole trader or partner will profits between the Small Profits and Lower profits limit will accrue state pension without any liability to Class 2 NIC. From next tax year, the weekly rate of Class 2 NIC will rise in line with inflation to £3.15.
Income tax rate cut
The basic rate of tax will be cut from 20% to 19% from April 2024. The basic rate of tax has not been cut in 16 years.
Fuel duty eased
Fuel duty will be broght down for the first time in 20 years by 5 pence per litre. The reduction in fuel duty is hoped to offset some of the rising energy costs. The cut will be effective for one year with effect from today.
Employment allowance to increase
The employment allowance will exempt the first £5,000 of employer’s national insurance otherwise payable. This £1,000 increase in rate will take effect from April 2022.
VAT savings on energy saving materials
The government is extending the zero rated Vat on the energy saving materials. Typical examples include rooftop solar panels and loft insulation.
Business rate relief to be extended
Many business are not liable to business rates on account of the small business rates relief. Rate paying businesses will benefit from a freeze in the business rates multiplier during 2022/23. A 50% reduction in rates will continue to apply to certain hospitality sector businesses. Establishments such as pubs, cinemas and corner shops will not have to face any rise in rates from 2021/22.
Annual Investment allowance to increase five-fold
To encourage economic growth, the annual investment allowance will be increased to £1 million from 1 April 2023. This is an increase from the current level of £200,000. The allowance determines the amount of investment in assets that can be deducted from taxable profits each year.
Help to Grow
Government subsidy will be available to certain companies with between 5 and 249 employees towards the cost of certain equipment and training.
Light on change but only about 7 weeks after announcement of the Health and social care levy, the Budget acted mainly as recap on regulation scheduled for the Finance Bill 2021/22. Rishi Sunnak’s third Budget made further pledges to increase spending on the NHS.
As announced on 7 September, the rate of tax on dividend income will increase by 1.25% from 2021/22. Consequently the ordinary rate will be 8.75%, the upper rate 33.75% and the additional rate 39.35%.
Advancement in retirement age
From 6 April 2028, the normal pension age is set to increase from 55 to 57. This will affect the earliest date on which pension benefits can be drawn.
Annual Investment Allowance up
The Finance Bill 2021/22 will legislate for the temporary increase in Annual Investment Allowance to £1,000,000 to extend until 5 April 2023.
Residential Property Developer Tax
As stated by the government in February 2021, a surcharge of 4% will be levied on corporation tax profits from property development companies. However this will only apply to profits above an annual allowance of £25 million.
Capital Gains tax reporting time limits to be extended
The payment deadline will also increase to 60 days, but for residential property disposals only.
Promoters of Tax Avoidance to be more heavily punished
Further enforcement measures are introduced to penalize promoters of tax avoidance. Thee include the freezing of any promoter’s assets.
Benefit-in-kind taxation to increase for vehicles
From 2022/23, the van benefit charge will increase to £3,600 and the multiplier used in calculating the car benefit will increase to £25,300. The van fuel benefit charge will also increase to £688. This will increase the tax burden on companies providing vehicles to employees and directors as a perk.
NIC to rise in line with inflation
National Insurance thresholds will increase in line with Consumer Price Index (or CPI) which at the time of writing is measured at 3.1%. Nonetheless, the upper profits limit (for self—employed) and upper earning limit (for employed individuals) will remain at current levels through 2021/22.
The amount of tax for all working age employed individuals and self-employed people will go up by 1.25% with income above the earnings threshold and lower profits limit. The levy therefore applies to the main rate by increasing it to 10.25% for self-employed individuals, to 13.25% for employees and to 15.05% for employers. The additional rate for all working age individuals will increase to 3.25%.
From April 2023, the levy will also apply to people who are working over the state pension age. However, pension income itself will not remain subject to the H&SC levy and therefore the burden of extra tax will weigh predominantly on the working population.
A hike in national insurance, dubbed the ‘social care levy’, will be phased in by the government from next April. The government will increase national insurance of 1.25%. Currently, national insurance is not payable by individuals of who have reached the state retirement age, which is currently 66 for most people. However, from April 2023, the levy will be payable by all adults.
The employee’s national insurance threshold is currently £9,568 per year. Therefore, a person with an income of £20,000, will pay an extra (20,000 – 9,568 x 1.25%, or) £130.40.
The employer’s national insurance threshold is currently £8,840 per year. Therefore, an employer hiring a person with an income of £20,000, will pay an extra (20,000 – 8,840 x 1.25%, or) £139.50.
There is also an upper earnings limit for employees. This is the limit at which the national insurance rate currently decreases to 2%. The new levy, however, will not stop at the upper earnings limit. Therefore, a worker on for instance £100,000, will pay an extra (100,000 – 8,840, @ 1.25% or) £1,139.50.
Self-employed national insurance levy
The social care levy will also apply to the self-employed liable to Class 4 NICs. The increase in national insurance for sole traders and partners will be the same as that illustrated above for employees. It should be noted that the levy is effectively an increase of 2.5%, since it is 1.25% for employers and 1.25% for employees. The levy disproportionately affects employed over self-employed workers.
Contractor company national insurance levy
In addition, the tax paid on dividends will also increase by 1.25%. Consequently, starting 6 April 2022, basic rate dividend tax will be 8.75%, higher rate dividend tax will be 33.75% and the tax on dividends for additional-rate taxpayers will be a whopping 39.35%.
According to the government statement, the extra income will be used -specifically- to fund the NHS and social care. As a consequence, the levy will be of least cost and of greatest benefit the nations of Scotland, Wales and Northern Ireland. The Prime Minister acknowledges that yesterday’s announcement breaks a manifesto pledge not to increase national insurance, income tax or VAT. The reason given is the cost of the pandemic. Business groups argue these tax reforms will slow the pace of economic recovery.
In his opening remarks, Mr Sunak put into numbers the sheer cost of supporting the economy through the pandemic. He explained that borrowing had been at its highest since World War 2. This places the UK in a predicament because a mere 1% increase in interest rates would add £25 billion to the cost of debt. Fiscal measures aim to stimulate the economy through its recovery phase and afterward buffer finances to shore up British debt.
Among rumours and fears of shock tax rises especially to capital gains tax, the 2021 Budget has been one of the more keenly awaited. One year into lockdown, and with public borrowing at a record high, the pressure is on fiscal policy makers to start calling in revenue. Too early and tax rises could set back the much-needed economic recovery. Financials have helped ease the predicament. Britain steals the march in its vaccination program, has been helped by a surging London stock market index and pound nearing a three-year high.
At 19%, corporation tax is the lowest of G7 nations, and with the Tory manifesto pledge to freeze rates on income tax, national insurance and VAT, it was placed as prime candidate for revenue raising. Rishi Sunak restated the pledge not to raise income tax, NI or VAT.
Even at 25%, corporation tax remains the lowest in the G7 nations. Other nations, also faced with the challenge of the costs of covid, are likely to respond with similar tax rises which could help to keep the British company tax rate competitive, in spite of the hike announced today.
Businesses with profits of less than £50,000 will continue to enjoy the lower rate of 19%. Once profits exceed £50,000 a tapering will be introduced. Only business with profits of £250,000 or greater taxed at full rate
The change of rate from 19% to 25% marks a significant U-turn on George Osborne and David Cameron’s policy. Globalisation facilitates the ability of business to route profits through lower tax jurisdictions. The trend about increasing tax on individuals responded to this fiscal challenge. Consequently, the ability of the corporation tax hike to deliver on its revenue objective could be overstated.
From April 2023, many businesses will prefer the tax implications of remaining unincorporated. The more tax efficient route for self-employed will likely become sole trader or, where two or more individuals or working together, partnership of LLP.
Loss carry back window to be lengthen from one to three years
Currently a loss can only be carried back one year for corporation tax purposes. One exception is when a company ceases. Effective April 2021, companies will be able to carry back up to £2 million to the preceding three years. The measure will be particularly valuable to companies that have suffered losses as a result of Covid.
Income tax thresholds left practically unchanged
Recent Budgets have seen successive rises in the threshold at which individuals start paying tax. However, today’s Budget confirmed almost no change in personal allowance. Inflation is widely expected to creep into the system as a consequence of extravagant government debt purchase and therefore a freeze on rates and allowances could give cause to a taxpayer loss in real terms. The process by which the buying power of money reduces but tax rates remain unchanged is referred to as fiscal drag. It is often highlighted in the context of the UK inheritance tax nil rate band.
The personal allowance will increase to £12,570 from 2021/22 and then remain fixed until April 2026. The higher rate tax threshold will nudge up to £50,270 and then also remain frozen until the next Parliament.
The following thresholds will not change until 2026:
Employees will continue to be entitled to receive 80% of pay for hours not worked until 30th September 2021. There will be no change in the scheme until the end of June. For the month of July, however, employers will be required to contribute 10% of salary, and for August and September, 20% of salary for hours not worked. The government would therefore pay for the remaining 60% for the final two months of the scheme.
A fifth self-employment income support scheme scheduled
As previously announced, a forth SEISS grant, will be available to cover lost profits up to the end of April. The grant will be based on 80% of average profits for the three months, subject to a cap of £7,500.
A fifth and final grant will be open to applications from May which will have a value equal to three months’ of average profits. Self-employed people with a turnover which has fallen 30% continue to receive full grant. For other business owners, the grant will be equal to 30% of profits.
The SEISS had not previously been available to the newly self employed. However, announced in today’s statement a self-employed person who has filed a 2019-20 by midnight yesterday will be eligible for the fifth grant.
Uplift in universal credit, minimum wage and apprenticeship grants
To support low income households, the weekly Universal Credit increase of £20 will continue for a further six months. To match this increase a one-off payment of £500 will be available to claimants of the Working Tax Credit. Neither Universal Credit nor Working Tax Credit is subject to tax.
The Chancellor announced a national living wage increase to £8.91. The incentive to business for hiring an apprentice will now run until September 2021 and apply to apprentices of any age. The incentive payment will be increased to £3,000.
Restart Grants launched
The Government roadmap has set out that non-essential retail business will be allowed to open from 12th April 2021. Affected businesses will be eligible for grants up to £6k per premises.
Hospitality, accommodation, personal care and gym, entertainment, tourism and performing arts venues will be required to stay closed. A reopening date of 17th May has been pencilled in. Affected businesses in the hospitality sector will be eligible for grants of up to £18,000 to help restart.
The Restart Grant for Film & TV Production will also be extended and a £300 million fund will be set up to support theatres.
Continuation of loans to business
Bounce-back loan and CBILs come to an end. On the expiry of the current lending programme, a new loan will be available of between £325k up to £10 million through to the end of the year. The government guarantees lenders up to 80% of the value of these loans.
Business rate holiday to continue
A business rate holiday is currently enjoyed in the hospitality, leisure and retail industries. This business rate holiday will continue until the end of June 2021. Business rates will be discounted up to 2/3rds until the end of the year.
Reduced rate VAT for the hospitality sector be prolonged
For business in the hospitality and leisure sectors, the 5% reduced rate of VAT will extended until six months until end of September. From 1 October 2021, an interim rate of 12.5% will apply. Business eligible to enjoy the reduced rate charged to their customers will not be required to return to the standard rate of 20% until April 2022.
Stamp duty holiday prolonged
The £500,000 stamp duty land tax threshold will end on 30th June, rather than the previously published expiry date of 31 March 2021. From 1st July to 30th September, the nil tax threshold will be lowered to £250k. It will only be from 1st October 2021 that the SDLT threshold will return to the pre-covid limit of £125,000.
The government affirmed its commitment to help the affordability of homes. Lenders offering mortgage of 95% will obtain government guarantees for debt up to £600,000.
Capital allowance super-deduction introduced
The Chancellor set out his plan for an “Investment led recovery.” By way of policy the most significant announcement was a “Super-deduction” from taxable profits for capital expenditure.
For the next two years, a business investing in qualifying plant and machinery, will be entitled to a capital allowance of 130%.