As the Government edges society back towards something that resembles normality, we at Rickard Luckin were keenly awaiting what this year’s Budget would mean for our clients, given the unprecedented year that we have all experienced.
The chancellor set out that the cost of COVID-19 on public finances is in the region of £407 billion. It was anticipated the he might use this budget to look to address this by raising taxes, but that wasn’t the case, not yet anyway.
Instead, Mr Sunak decided to focus his budget on measures aimed at stimulating the economy but with one eye on tax rises in the future.
Two critical arms of the Budget affecting our clients are Corporation Tax and Personal Tax, and here we saw a budget of two halves: one of shift and one of stasis.
With the manifesto commitment to not increase Income Tax, National Insurance or VAT rates, the Government opted for a blanket freeze on the personal tax rates and allowances until April 2026.
This freeze incorporates the Personal Allowance and Higher Rate Threshold for Income Tax, Annual Exemption for Capital Gains Tax, and the National Insurance thresholds.
However, due to inflation and an increasing living wage, by not increasing these rates and allowances, taxpayers will pay additional tax the longer this freeze remains in place, under the dubbed “fiscal drag”.
Conversely, Corporation Tax saw a significant shake-up. The Government took bold decisions by introducing a more generous investment allowance and increasing the Corporation Tax rate from April 2023.
From 1 April 2021 until 31 March 2023, companies may claim a ‘Super-deduction’ of 130% on most plant and machinery, without limit. This is the upgraded version of the current Annual Investment Allowance of 100% deduction, up to £1 million each year.
The super-deduction can only be claimed against new assets acquired from 1 April 2021 and contracts entered into from 3 March 2021. There will be a phase-out of the deduction when accounting periods straddle the 1 April 2023.
The second significant Corporation Tax change is the increase in the tax rate to 25% for companies with taxable profits over £50,000 from April 2023. Between £50,000 and £250,000, the effective tax rate on taxable profits is 26.5%. However, with a marginal relief deduction, the overall rate paid will fall between 19% and 25%, creating a ‘tapering’ effect.
These two Corporation Tax changes appear to be connected. Given the increased tax rate, there would be a tendency for companies to defer significant investments until the tax rise to utilise relief at the higher rate. However, the Chancellor now wants to unlock the cash held by profitable companies to boost the economy. The super-deduction, therefore, has been introduced to incentivise companies to invest their reserves and provide a much-needed boost to the economy.
Whilst immediate tax rises weren’t announced, several consultations focusing on future tax changes are due to be released on 23 March 2021. These consultations may provide greater insight into when certain changes, which attracted significant pre-budget speculation, could be introduced, such as an increase to the Capital Gains Tax rates or the generous Inheritance Tax Reliefs that we currently enjoy.
Any proposed changes will not be implemented until a future date, and therefore, there is currently an opportunity for tax planning in these areas.
Overall, taxpayers are likely to notice a pinch from paying additional tax at the latter end of the 5-year freeze. However, greater certainty provides more reliable tax planning opportunities, which Rickard Luckin is more than happy to discuss with clients.
Small companies may not see a change in their tax rate, but they can still capitalise on the super-deduction. This will encourage the much-needed boost to the small businesses that are the backbone of the UK economy. More profitable companies however, will experience a rise in their tax bill for April 2023.
No action should be taken without seeking professional advice relevant to your specific circumstances, and we would advise speaking with your usual Rickard Luckin contact to discuss any of the above in more detail or by visiting us online at www.rickardluckin.co.uk
Our Budget Report, which was written immediately after the Chancellor of the Exchequer delivered his Budget Speech, provides an overview of the latest announcements and recent measures most likely to affect you or your business, and you can download this for free by clicking here.