Autumn Budget 2021 - Personal Taxes

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Prior to announcing the Autumn Budget, Sunak indicated he would fund spending pledges through tax rises. Whilst it was expected that inheritance tax (IHT) would be a likely target it remained untouched although the Chancellor said he would "consult on further changes to the regulatory charge cap for pension schemes, unlocking institutional investment while protecting savers".

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Basis Period Reform and MTD for Income Tax

Following responses to the recent HMRC consultation into the reform of ‘basis periods’ for the taxable profits of sole traders and partnerships, the government has confirmed that the changes will be delayed until the 2024/25 tax year, with 2023/24 being the transitional year.

The new rules will require taxable profits to be calculated for the tax year rather than for the period of account ending in the tax year. This will allow the removal of the commencement, cessation and change of accounting date provisions. It will also eliminate overlap profit and the need for overlap relief.

Although this will be viewed as a simplification for many sole traders and partnerships, a sizeable number of businesses (particularly large professional practices) have raised valid concerns about the significant additional administrative burden caused by the new rules, as well as cash flow difficulties arising from transition to the new system. The deferred introduction is, therefore, welcome to allow businesses time to plan for the changes accordingly.

Some technical changes to the proposed transitional rules are also expected in light of the consultation feedback, hopefully including more flexible use of overlap relief arising in the transitional year and provisions to reduce the impact of transitional period profits on allowances and benefits. More detail will be available on 4 November 2021 when the Government will be publishing its consultation response and Finance Bill legislation.

As previously announced, the Government has also confirmed that Making Tax Digital (MTD) for income tax will now be introduced from 6 April 2024, one year later than previously scheduled. Sole traders and landlords with income over £10,000 will be mandated to join MTD from that date. General partnerships (comprised of only individual partners) with turnover exceeding £10,000 will be required to join from 6 April 2025, but the timetable for when other partnerships, including limited liability partnerships (LLPs), will be required to join remains unclear.

Capital Gains Tax (CGT) on UK property – reporting and payment deadline extended to 60 days

Since 6 April 2020, UK residents who dispose of UK residential property have been required to submit a UK Land Return within 30 days of completion and also pay any CGT due within the same timeframe. Certain exceptions apply, for example where the property sold fully qualifies for Private Residence Relief. Non-UK residents are also required to submit UK Land Returns, but with a wider scope that also covers the disposal of UK commercial property and shares in certain companies that hold UK property. Penalties and interest are charged by HMRC where the return and/or payment are late.

The Chancellor announced that from today the deadline for submitting the return and making payment will be extended to 60 days after the sale completes. This will apply to disposals with a completion date on or after 27 October 2021 and to both UK and non-UK residents.

The announcement will be welcome news to property investors and their advisers and will ensure that there is sufficient time for the information needed to accurately complete the returns to be collated.

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Pension tax changes

Addressing the Low Earners Anomaly

The Chancellor has announced measures that will, from 2024/25, address a long standing anomaly that disadvantages some low earning employees. Essentially, an employee who earns below the personal allowance receives no tax relief on their occupational pension contributions. In contrast, basic rate tax relief for personal pensions is obtained through a top up payment from HMRC directly to the pension fund even where the member pays no income tax. It is suggested that following the end of a tax year, HMRC will calculate and make a compensating payment directly to affected employees - calculated to be an average payment of £53pa to those affected. The fact that HMRC will be responsible for identifying, calculating and paying the sum is welcome.

Consultation on lifting the charges cap for auto-enrolment schemes

A consultation has been announced to discuss lifting the cap that limits the fees that can be charged by pension providers to most auto-enrolment pension schemes that are set up by employers. The current cap of 0.75% of funds under management exists to protect the members’ interests but is seen to impede the ability for advisers to carry out the necessary due diligence to access certain investment opportunities. The consultation will look to balance protection of individuals against the opportunity to access long term assets with better growth returns. If implemented, it is expected that the measures would also unlock a substantial source of institutional investment for UK businesses. 

Minimum pension age

Despite some lobbying, the Government also confirmed that it will implement the proposed increase in the normal minimum pension age, from 55 to 57, that is to take effect from 6 April 2028.

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Dividend Tax Rate increase from April 2022

As announced by the Prime Minister in September, the tax rates that apply to dividends will increase across the board by 1.25%. This increase will take effect from tax year 2022-23.

From 6 April 2022 the tax rates that will apply to dividends will be 8.75% (basic rate), 33.75% (higher rate) and 39.35% (additional rate), dividends will continue to be taxed as the top slice of an individual’s income. All individual taxpayers will continue to be entitled to the tax-free dividend allowance of £2,000 per year. 

The increase in the dividend rates puts them closer than ever to the mainstream rates of income tax that apply to earnings from employment and self-employment. The increase was announced at the same time as the 1.25% increase to National Insurance (NI) and will mean those individuals who receive the main part of their income in dividends (which are not subject to NI) also make a similar contribution.

Company owners who have the option to take dividends or a bonus from their business will see changes in the effective rates of tax suffered on each option in future years – particularly when the rate of corporation tax rises in 2023. Owners should consider taking specific advice on cost-effective ways to withdraw profits from their business.

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On-demand webinar: Autumn Budget 2021

Our tax experts Vanessa Lee, Caroline Harwood, Liam O'Doherty and Glyn Woodhouse, analyse the Chancellor’s announcement, and what this could mean for you or your business.


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