Budget 2021 - Personal Taxes
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The most important change to personal taxes was freezing of personal and other allowances from 2022. The Chancellor also announced additional grants for the self-employed that will help those who have completed tax returns for 2019/2020 and may not have previously qualified. Finally, the government is to launch a Green Bond through NS&I to encourage investment that will in turn fund climate change initiatives.
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Personal Allowance frozen for 5 years
The tax-free Personal Allowance (PA) and Basic Rate Band (BRB) increase by a modest amount each year in line with the Consumer Price Index. For the tax year ended 5 April 2022, it had already been announced that these would increase to £12,570 and £37,700 respectively. The Chancellor confirmed these figures, but announced that the PA and BRB will now be maintained at these 2021/22 levels until 5 April 2026.
This means that for tax years ended 5 April 2022 until 5 April 2026, an individual will be able to have an annual income of £12,570 before paying any tax, and will be taxed at the higher 40% rate (32.5% for dividends) once their income exceeds £50,270. The PA will continue to be reduced for those with incomes in excess of £100,000, and no change was announced to the 45% (38.1% for dividends) additional rate, which will continue to apply to annual incomes of more than £150,000.
While this policy decision will not reduce after-tax income, the Chancellor made clear that over the five year period this freeze will raise revenue by pushing more and more people into the higher rate tax brackets as their earnings and other income increase.
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Restriction of relief for gifts of business assets
Capital gains tax holdover relief allows deferral of tax on the gift of a business asset made by an individual. A qualifying business asset is broadly an asset used by an individual for their trade, or shares and securities in an unquoted or personal trading company (but gifts of shares or securities to another company will not qualify for relief).
A decision by the Upper Tier Tax Tribunal in 2018 identified a flaw in this legislation – the current law only prohibits holdover relief for gifts of business assets to non-UK companies controlled by persons ‘connected’ with the person making the gift (it does not mention control by the person making the gift). From 6 April 2021, this is rectified, so that both the individual and anyone connected to them will be excluded.
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Opportunities for environmental and social investors
The government announced the introduction of a new Green Savings Bond, which will be available through National Savings and Investments (NS&I). The product will give ordinary savers the opportunity to invest funds which will be earmarked for ‘green projects’ such as renewable energy. Further details of how the new product will operate, including rates, are expected to be announced over the coming months in advance of the product launch in summer 2021.
It was also announced that there will be an extension to Social Investment Tax Relief (SITR). SITR encourages taxpayers to invest in qualifying social enterprises, charities, and community business by offering 30% income tax relief on qualify share and debt investments.
Two capital gains tax (CGT) breaks are also given by allowing the deferment of gains where the proceeds are invested in the social enterprise, and by offering a CGT-free exit where SITR income tax relief has been claimed. One of the main conditions for the various tax reliefs to be available is that the investment is held for at least three years.
SITR was set to end on 5 April 2021, but has now been extended until 5 April 2023 for both the income tax and CGT reliefs - a welcome announcement for social enterprises and those looking to support them.
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Self Employed support up to September 2021
In March 2020, the Chancellor first announced the introduction of the Self-Employed Income Support Scheme (SEISS) for self-employed individuals whose incomes were effected as a result of COVID-19. The scheme was broadly intended to mirror the support given to employees under the furlough scheme.
Since then, there have been two further extensions (grants) to the scheme, continuing to provide support to eligible self-employed individuals up until January 2021. A fourth grant up to April 2021 was also previously announced, and the Chancellor has now confirmed that the level of support for the fourth grant will be 80% of three months’ average trading profits, capped at £7,500. As for previous grants, the amount will be paid in a single instalment, and will be a taxable receipt of the self-employed business.
The main conditions for eligibility for the grant continue to be:
- Trading profits of no more than £50,000 (now based on 2019/20 figures) – but where not eligible for 2019/20, profits of tax years back to 2016/17 can be considered
- Individual must have traded in both 2019/20 and 2020/21
- The 2019/20 tax return must have been submitted to HMRC by 2 March 2021
- Reduced trading (or temporarily not trading) as a result of COVID-19
- A reasonable expectation that there will be a significant reduction in trading profits
- Intention to continue to trade.
The government estimates that there will be up to 600,000 individuals who will be newly eligible for the support provided by the fourth grant, including those that commenced self-employment in the 2019/20 tax year. HMRC will contact individuals eligible for the fourth grant in mid-April, and publish more guidance on making the claim in due course.
The Chancellor also announced a fifth and final grant, taking SEISS relief up to the end of September 2021. The calculation for the fifth grant will look at how much turnover has reduced in the year April 2020 to April 2021, and a payment will be made as follows:
- 80% of three months’ average trading profits, capped at £7,500, for those with a turnover reduction of 30% or more
- 30% of three months’ average trading profits, capped at £2,850, for those with a turnover reduction of less than 30%.
Eligible individuals will be able to submit claims for the fifth grant from late July 2021.
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