Budget 2021 – In Summary
The newspapers, the morning after the Chancellor delivered his third Budget, are full of unusual comments never previously written about a conservative chancellor in 50 years or more.
Mr Sunak came into the chamber with great optimism but he needed to do a number of things to ensure his budget would be based on more than just hot air. He was expected to sure up the recovery with a big investment package, act on the climate crisis and protect struggling families. Strangely for conservative party supporters, this needed to be a ‘progressive’ budget but did he do enough?
Well, not as predicted, there was a larger than expected spending on public services which will be seen as good news and has, more surprisingly, locked in a consensus that we cannot return to the austerity of the past decade. However, these welcome investments in public services were overshadowed by a budget that barely mentioned the climate crisis just days before COP26.
The chancellor said he wanted to build a new economy coming out of the pandemic but there was little to see or compare to. Mr Sunak could have tried to ‘super charge’ the economy as they are trying to do in the USA with a £70bn a year stimulus to create 800,000 jobs and smooth our transition to ‘net zero’. However, the newspaper headlines will tell us he opted instead to slash fuel passenger duty on domestic flights and ducked the chance to bolster an economy that remains at least 2% below its pre-pandemic path.
Never mind COP26, the newspaper journalists are saying this Budget was anti-green citing the encouragement of more car usage and domestic flights, not trains. It will be difficult for Mr Sunak to defend the position in the coming days of interviews and political scrutiny as it will do little to ‘level up’ with the cost-of-living crisis hitting pockets hard through this winter.
There will be slim pickings for most departments, especially education, with only the NHS being a real gainer in this rather strange conservative party spending spree. Even here with extra capital for technology and buildings, the health service is likely to continue to struggle as it remains understaffed and threadbare after so many years of underfunding.
There is a number of oddities that will be difficult for Mr Sunak and his Treasury team to defend. Notwithstanding the increase in National Insurance contributions for all workers, how will they argue the point that unearned profits from landlords’ rents, share dividends and private equity are subject to a fraction in tax. Probably the most difficult position for the Chancellor to defend will be providing banks with tax relief, while the grossly undertaxed Amazon and online retailers escape yet again.
Surprisingly, Mr Sunak displayed rare benevolence by a conservative Chancellor. Government departments will get real-budget increases of 3% a year on average until 2024-25, an increase last seen consistently in the 2000s. Even more eye-popping are the chancellor’s plans for the size of the post-pandemic state. According to forecasts by the Office for Budget Responsibility (OBR), spending will grow from 39.8% of GDP before the pandemic to 41.6% by 2026-27, the highest sustained share since the 1970s. Tax will rise from 33.5% of GDP to 36.2%, a level not seen since the early 1950s.
Here is a summary of the current position.
Personal Allowances – The personal allowance is currently £12,570. The Chancellor announced in March 2021 that the personal allowance will be frozen at £12,570 for the tax years 2022/23 to 2025/26. There is a reduction in the personal allowance for those with ‘adjusted net income’ over £100,000. The reduction is £1 for every £2 of income above £100,000 meaning no personal allowance where adjusted net income exceeds £125,140.
Income Tax bands & Rates – The basic rate of tax remains at 20%. In 2021/22, the band of income taxable at this rate is £37,700 so that the threshold at which the 40% band applies is £50,270 for those who are entitled to the full personal allowance. In March 2021, the Chancellor announced the basic rate band will be frozen at £37,700 for the tax years 2022/23 to 2025/26.
The National Insurance contributions Upper Earnings Limit and Upper Profits Limit will remain aligned to the higher rate threshold at £50,270 for these years. Individuals pay tax at 45% on their income over £150,000.
Scottish residents – The tax on income (other than savings and dividend income) is different, for taxpayers who are resident in Scotland. In 2021/22, there are five income tax rates which range between 19% and 46%. Scottish taxpayers are entitled to the same personal allowance as individuals in the rest of the UK. Currently, the 41% band applies to income over £43,662 for those who are entitled to the full personal allowance. The 46% rate applies to income over £150,000.
Welsh residents – From April 2019, the Welsh Government has had the right to vary the rates of income tax payable by Welsh taxpayers. The UK government has reduced each of the three rates of income tax paid by Welsh taxpayers by 10 pence. For 2021/22, the Welsh Government has set the Welsh rate of income tax at 10 pence which has been added to the reduced rates. This means the tax payable by Welsh taxpayers is the same as that payable by English and Northern Irish taxpayers.
Dividend Tax – The first £2,000 of dividends is chargeable to tax at 0%. Dividends received above this level are taxed at the following rates for 2021/22:
7.5% for basic rate taxpayers
32.5% for higher rate taxpayers
38.1% for additional rate taxpayers
In September 2021, the government announced an increase to the rates of dividend tax by 1.25% from April 2022 to help fund the new planned investment in health and social care. The new rates will be 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers and 39.35% for additional rate taxpayers. Dividends within the allowance still count towards an individual’s basic or higher rate band and so may affect the rate of tax paid on dividends above the Dividend Allowance.
Clients should remember that dividends on shares held in ISAs and pension schemes are not subject to dividend tax and thus will not be affected by the increase in rates.
New National Savings & Investment (NS&I) – Green product
Earlier in 2021, the government announced a green retail savings bond through NS&I. These bonds are now available to buy online and offer savers a chance to support green projects at a fixed rate of 0.65% p.a. over a three-year term. The bonds are available to those aged 16 or over, with a minimum investment of £100 and a maximum limit of £100,000 per person.
The interest is taxable in the tax year the bond matures.
This is the UK’s inaugural sovereign green bond and was formerly launched in September 2021, followed by a second issuance in October 2021. They are the first sovereign green retail products of their kind in the world. We have to wait to see how popular they will be with the public in due course.
Capital Gains Tax – No changes to the current rates of CGT have been announced. This means that the rate remains at 10%, to the extent that any income tax basic rate band is available, and 20% thereafter. Higher rates of 18% and 28% apply for certain gains, mainly chargeable gains on residential properties, with the exception of any element that qualifies for Private Residence Relief.
Business Asset Disposal Relief (BADR). This is targeted at directors and employees who own at least 5% of the ordinary share capital in the company, provided other minimum criteria are also met. It can also apply to owners of unincorporated businesses.
Investors’ Relief. The main beneficiaries of this relief are investors in unquoted trading companies who have newly subscribed shares but are not employees.
Current lifetime limits are £1 million for BADR and £10 million for Investors’ Relief.
CGT annual exemption – The CGT annual exemption will be maintained at the current level of £12,300 for 2022/23 and up to and including 2025/26.
Inheritance tax (IHT) nil rate bands – The nil rate band has been frozen at £325,000 since 2009 and this will continue up to April 2026. An additional nil rate band, called the ‘residence nil rate band’ (RNRB) is also frozen at the current £175,000 level until April 2026. A taper reduces the amount of the RNRB by £1 for every £2 that the ‘net’ value of the death estate is more than £2 million. Net value is after deducting permitted liabilities but before exemptions and reliefs. This taper will also be maintained at the current level.
Gaming Duty – The government will raise the bandings for Gaming Duty in line with inflation. The new bandings will affect Gaming Duty accounting periods commencing on or after 1 April 2022.
Vehicle Excise Duty (VED) – The government will increase VED rates for cars, vans, motorcycles, and motorcycle trade licences in line with RPI with effect from April 2022. For heavy goods vehicles, VED continues to be frozen in 2022/23. The HGV Levy is suspended for another 12 months from August 2022.
Tobacco Duty – Increases in Tobacco Duty rates take effect from 27 October 2021 and the government will legislate in the Finance Bill 2021-22 to introduce tougher sanctions to tackle Tobacco Duty evasion.
Alcohol Duty – Rates of Alcohol Duty were not changed. The government is publishing a consultation on its detailed proposals for Alcohol Duty reform. These include:
changes to duty structures
new rates for some products sold on draught
extension of small producer reliefs
simplification of the administrative regime.
In addition, alcohol duties have been frozen to February 2022.
Air Passenger Duty (APD) – The government will introduce a new domestic band for APD for reduced rate and standard rate travel, covering flights within the UK. In addition, a new ultra-long-haul band will be introduced, covering destinations with capitals located more than 5,500 miles from London. These changes will take effect from April 2023.
Plastic Packaging Tax – Draft legislation has been issued to establish a Plastic Packaging Tax. This is a new tax that applies to plastic packaging produced in or imported into the UK, that does not contain at least 30% recycled plastic. Plastic packaging is packaging that is predominantly plastic by weight. The tax rate will be £200 per tonne of non-compliant plastic packaging. The tax will take effect from April 2022.
Corporation tax rates – The main rate of corporation tax is currently 19%. In the Spring Budget 2021, the Chancellor announced the rate would remain at 19% until April 2023 but the rate will then increase to 25% for companies with profits over £250,000. The 19% rate will become a small profits rate payable by companies with profits of £50,000 or less. Companies with profits between £50,001 and £250,000 will pay tax at the main rate reduced by a marginal relief, providing a gradual increase in the effective corporation tax rate.
Residential Property Developer Tax – A new tax will apply from April 2022 on company profits derived from UK residential property development. The tax will be charged at 4% on profits exceeding an annual allowance of £25 million. For companies that are part of a group, the £25 million allowance will be allocated by the group between its companies.
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