Chancellor Rishi Sunak delivered his Budget 2021 speech to the House of Commons on 27th October – a fiscal approach designed to prepare the UK for an “age of optimism” in the post-Covid-19 economy. Nevertheless, Mr. Sunak sounded a note of caution that this Budget did not draw a line under Covid-19, acknowledging issues regarding increasing inflation and cost of living.
Despite this cautionary mood, the Office for Budget Responsibility confirmed that economic growth in 2021 had been revised up from 4% to 6.5%, with the economy set to grow a further 6% in 2022. Meanwhile nationwide unemployment levels are set to peak at just 5.2%.
With the previous announcement that corporation tax is set to increase from April 2023, the freezing of personal tax thresholds and the introduction of the new Health and Social Care Levy, many business owners may breathe a sigh of relief that significant additional tax rises were not announced. The Chancellor was also silent on potential reforms to the tax system, such as capital gains tax, inheritance tax, pension relief and the taxation of work.
Read on to discover the key announcements in Budget 2021 relative to the UK’s army of small businesses and the self-employed.
What was announced before the Budget?
National Insurance Contributions set to increase
The Health and Social Care Levy was introduced by Prime Minister, Boris Johnson in September and will apply to employees and employers liable for Class 1 NIC and to self-employed individuals liable for Class 4 NIC. It will be introduced from April 2022.
For the average basic rate employee earning £20,000 per annum, they will contribute an additional £130 a year. Meanwhile a typical higher rate employee earning £80,000 per annum will pay a further £880 a year.
It is important to note the NIC increase will also apply to employers too, who will pay an additional 1.25% in employer NIC from April 2022.
Employers will have to pay the levy for employees earning above the Secondary Threshold of National Insurance, which is £8,840 in 2021-22. Existing reliefs will continue to apply for employers of apprentices under the age of 25, all employees under the age of 21, veterans, and new employees in freeports from April 2022.
The Employment Allowance allows eligible employers to reduce their NIC liability by up to £4,000 per year. The Government believes that 40% of small business owners will pay nothing extra in employer NIC.
Dividend tax to rise from April
Individuals who receive dividend income will also face a higher tax bill as all rates of dividend tax will increase by 1.25% from April 2022.
The dividend tax is applicable on dividend income above the frozen £2,000 dividend allowance and above the £12,570 personal allowance. Dividends on assets held in ISAs are excluded from the dividend tax.
From the 2022-23 tax year, basic rate dividend tax will be charged at 8.75% instead of 7.5% for 2021/22. Higher rate dividend taxpayers will be charged at 33.75% instead of 32.5% and additional rate dividend taxpayers will pay 39.35% instead of 38.1% respectively
What did the Chancellor announce on the day of The Autumn Budget that affects business owners and the self-employed?
Research & Development Tax Credit reforms
The Chancellor announced changes to research and development tax credit relief from April 2023 to refocus the relief on to UK based businesses. Read more here.
National Living Wage set to rise
The National Living Wage will rise on 1st April 2022 by 6.6% to £9.50 an hour. Young people and apprentices will also see increases in the National Minimum Wage rates.
Basis period reforms and Making Tax Digital
The complex basis period rules for the self-employed will be reformed so business profit for a tax year will be the profit or loss arising in the tax year itself, regardless of the accounting date. As many sole traders will already prepare accounts to be aligned to the end of the tax year, this measure will only impact a relatively small percentage of the self-employed. The transition to the new rules will take place in 2023-24 with the new rules coming into force from 6th April 2024.
These changes are being made to support the move to a digital tax system. The Government had already announced they would give sole traders and landlords, with income over £10,000, an extra year to prepare for Making Tax Digital. Making Tax Digital for income tax will now be introduced from 6th April 2024.
The position is slightly different for partnerships. Making Tax Digital rules will apply from April 2025 to general partnerships that only have individuals as partners. All other partnerships (for example Limited Liability Partnerships or partnerships with corporate partners) will be required to join Making Tax Digital at a future date which has not yet been confirmed.
Annual Investment Allowance (AIA) extended
The Government announced the temporary AIA limit of £1million of expenditure on qualifying plant and machinery, which was due to due to end on 31st December 2021, has been extended to 31 March 2023. This aligns the timescale for claiming AIA with the existing timescale for the 130% super-deduction, so it is likely to be of limited benefit to a majority of UK companies already entitled to the 130% super deduction for the same period.
Recovery Loan Scheme extended
The Chancellor announced that the Recovery Loan Scheme made available to businesses planning their way out of the Covid-19 lockdowns would be extended until 30th June 2022.
From 1st January 2022, the following changes will come into force:
- The scheme will only be open to small and medium-sized enterprises
- The maximum amount of finance available will be £2 million per business
- The guarantee coverage that the Government will provide to lenders will be reduced to 70%
The above changes will apply to all finance applications made from 1st January 2022.
Further news and information on the Recovery Loan Scheme can be found here.
Business rates reformed
To reduce the burden of business rates in England, to support investment, and make the system more responsive, the Government will:
- freeze the business rates multiplier for a second year, from 1 April 2022 until 31 March 2023, keeping the multipliers at 49.9p and 51.2p
- introduce a new temporary business rates relief for eligible retail, hospitality and leisure properties for 2022-23. Eligible properties will receive 50% relief, up to a £110,000 per business cap.
- introduce a 100% improvement relief for business rates. This will provide 12 months relief from higher bills for occupiers where eligible improvements to an existing property increase the rateable value. The Government will consult on how best to implement this relief, which will take effect in 2023 and be reviewed in 2028.
- introduce from 1 April 2023 until 31 March 2035 targeted business rate exemptions for eligible plant and machinery used in onsite renewable energy generation and storage, and a 100% relief for eligible heat networks, to support the decarbonisation of non-domestic buildings
- increase the frequency of business rates revaluations so they take place every 3 years instead of every 5 years, starting in 2023
- extend transitional relief for small and medium-sized businesses, and the supporting small business scheme, for 1 year. This will restrict increases to 15% for small properties (up to a rateable value of £20,000 or £28,000 in Greater London) and 25% for medium properties (up to a rateable value of £100,000), subject to subsidy control limits.
More detailed information about this reform can be found here.
Landlord and second home owner - Capital Gains Tax (CGT) payment and report window increase
From 27th October 2021, the deadline to report and pay CGT after selling UK residential property will increase from 30 days after the completion date to 60 days.
For non-UK residents disposing of property in the UK, the same extended deadline will apply.
This much welcome relaxation will make things easier for UK residents where tax is due on the disposal of a UK residential property. The deadline for submitting a CGT return and paying the tax had previously been 30 days from the date of completion of the sale and this short deadline had caused difficulties.
Non-UK residents are required to submit a return regardless of whether there is any tax due on all types of property disposals so will benefit from the extended filing period.
Pension top-ups for lower paid workers
The Government has announced future changes to 'Net Pay' pension scheme arrangements which will mean that low earners will benefit from a top-up to their pension.
Presently, 'Net Pay' pension arrangements mean that employees save tax at their marginal rates which could be 20%, 40% or 45%. For low earners, this means that they receive no tax relief on their contributions whereas had these been made privately through a 'Relief at Source' scheme, they would have received a top-up of 25% of their net contribution.
The Government promised to fix the anomaly in their 2019 manifesto, and proposals announced today mean that those affected in 2024/25 are likely to see top-ups made in 2025/26.
While no other commitments were given to continued tax relief on pension contributions, the good news is that there seem to be no major changes planned in the short or medium term.
Fuel duty rise scrapped for 2022/2023
This expected move means fuel duty will be held at 57.95p per litre, preventing the planned 2.8p per litre increase which will cost the Treasury £1.5 billion.
According to the Government, the continued fuel duty freeze has saved the average UK car driver a cumulative £1,900.
Many organisations have been lobbying for a further fuel duty freeze and with the cost of a barrel of oil continuing to rise, further fuel price increases are predicted in the coming weeks.
Free webinar: The Budget over breakfast
In this webinar held on Thursday, 28th October, we provided an overview of the key announcements from the Autumn 2021 Budget and how they affect small business owners and those who are self-employed.
Date published 10 Sep 2021 | Last updated 1 Nov 2021This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.