Insights

This Budget was in many ways a landmark event; it provided the forum for Chancellor Rishi Sunak to set out a strategy to get the UK economy back on track after Covid-19.

He said, “We cannot draw a line under Covid, but we can prepare for a new, post-Covid economy and renewed optimism - this Budget is the foundation.” According to government data, employment levels are up, investment is growing, wages are rising, and economic activity forecasts have been revised upwards - expected to hit 6.5% this year and in the coming months.

A major implication of this budget will be the effect of fiscal drag, because tax allowances are largely frozen, but wages and the cost of living are rising. The personal income tax allowance will stay at £12,570 from April 2022, and each subsequent year until 2025/26, whilst the higher rate threshold will be frozen at £50,270. As pay increases, more people will be pushed over these thresholds and will be paying more tax. At the same time, prices are rising, so disposable income will be pinched.

The allowance freezes are having the same effect on capital gains tax, pensions, and inheritance tax; the annual capital gains tax exemption remains at £12,300; the pension lifetime allowance remains at £1,073,100; and the inheritance tax nil rate band and residential nil rate band remain at £325,000 and £175,000 respectively. Yet asset values are rising sharply in value, so tax receipts are also rising fast, because more people are pushed into these thresholds too.

Key changes and announcements in the Autumn Budget 2021

Enhancements to existing business tax relief schemes

A review and consultation into improving R&D tax credits has been ongoing and the chancellor said the existing scheme will be modified. Firstly, only research that has actually been conducted in the UK will qualify for the tax credits in future, so in fact a reduction in the relief, however the scope of eligibility will extend to cloud services and data storage, which is good news.

For businesses investing in new plant and machinery, the AIA (Annual Investment Allowance) will remain at the enhanced rate of £1 million until March 2023.

VAT stays on energy bills

There will be no reduction to VAT levied on household energy bills despite record energy prices. Rishi Sunak explained the increases are due to excessive energy demand, which is an outcome of excessive consumer demand after the Covid-imposed industrial slowdowns. The expected increase in fuel tax did not materialise.

New rates reduction for retailers

Bricks and mortar shops and business premises can benefit from a new 50% business rates discount. This is available for companies in the retail, hospitality and leisure sectors and will last for one year. Any eligible business can claim a discount of 50% on bills up to a maximum of £110,000.

Increased minimum wage

The minimum wage will be rising to £8.91 in April 2022, for taxpayers aged over 23 and

the age threshold has lowered - from 25 and over to 23 and over.  Under the new rules, workers aged between 21 and 22 will begin to receive £8.36 and workers aged between 18 and 20 will get £6.56 – up from £6.45. Under 18s will get £4.62 – a rise from £4.55 – and apprentices will receive £4.30, up from £4.15.

Other forthcoming tax changes – announced prior to the Budget

In addition, the following tax changes have already been announced, some becoming operational from the 2022/23 tax year.

• Income tax thresholds have been frozen as explained earlier and there will be a 1.25% increase to NICs and dividend tax (the health and social care levy).
• Corporation tax is increasing to 25% from April 2023 (from the 19% rate currently), which will impact all companies with profits greater than £50,000.

If you would like to discuss future tax planning or need help with tax compliance, please contact partners@rjp.co.uk.