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Guide to the Budget
BudgetMar 11 2021

Chancellor keeps some supports, but tax rises on the way

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Chancellor keeps some supports, but tax rises on the way
Credit: Jason Alden/Bloomberg via Fotoware

This means the self-employed income support scheme (SEISS) ends in September 2021, coinciding with the end of the furlough scheme.

Richard Churchill, a partner at Blick Rothenberg, explains this grant means there are now two grant periods in 2021: the fourth grant covering February to April and the fifth grant period covering May to September. 

The grant continues to work in a similar way to before with claimants receiving 80 per cent of their average monthly profits capped at £2,500 per month. 

However for the fifth grant to claim at the 80 per cent level of monthly income your self-employed income must have fallen by over 30 per cent as a result of Covid-19. 

If your income has not fallen by 30 per cent then the allowance of 80 per cent of average monthly earnings is replaced with 30 per cent.

Corporation tax was perhaps an unavoidable choice given the government’s unprecedented level of borrowing during the pandemic Adam Dunett, Zefra

Previously to be eligible for the SEISS you had to have filed a 2018/19 tax return covering the period 6 April 2018 to 5 April 2019 recording your self-employment income as well as continue to be trading in 2019/20. 

This meant that anyone who was newly self-employed and had started their self-employed business after 5 April 2019 was not eligible for the first three grants under SEISS. 

The chancellor has now allowed those who filed a 2019/20 tax return recording their self-employment income to be eligible for the fourth and fifth grants meaning that the ‘newly’ self-employed are now eligible to claim the grants, bringing in an additional 600,000 people into scope.

But while the newly self-employed have now been captured there are still those that have been excluded. 

Churchill says for those self-employed who previously earned more than £50,000 there is a “cliff edge” whereby they are ineligible to claim the grants; this is estimated to impact over 200,000 people and surely a form of tapered relief would have been fairer. 

He adds: “Additionally those self-employed who had other income accounting for more than 50 per cent of their total income are excluded. 

“There is estimated to be over 1.1m people impacted by this restriction whereby if you received various forms of income say salary, pensions, rental and these accounted for more than 50 per cent of your total income including self-employment income, then no support has been available.”

Rishi Sunak also made another major announcement which businesses took note of.

The planned increase of corporation tax to 25 per cent from its current 19 per cent signifies a notable departure away from the government’s policy to tax in recent times and stops the trend of corporation tax steadily reducing year on year.

It is in contrast to the stance adopted by Sunak’s predecessors - both George Osborne and Lord Philip Hammond – who repeatedly cut the tax rate and underlined their commitment to further reducing this to 17 per cent as a way of remaining competitive across the G20.

One of Osborne’s flagship tax policies was to reduce the corporation tax rate to encourage business investment in the UK. 

The rate reduced from 28 per cent to 20 per cent under his tenure. He announced a plan to reduce the rate to 17 per cent in his last budget and was quoted as wanting to go even further with a rate of 15 per cent being mentioned by him in some press quotes.

Hammond stopped the rate cuts but kept the rate steady at 19 per cent.

So Sunak’s plans represent the first corporation tax rise in 47 years and finding a similar approach would require you to go back to 1974 under a Labour government, with Denis Healey as Chancellor.

Corporation tax is a tax collected from companies. Its amount is based on the net income companies obtain while exercising their business activity, normally during one business year. 

The companies range from large multi-national household names, to smaller local companies and even to individuals who work through personal service companies. 

Under the plans announced by Sunak, from 1 April 2023, the main rate of corporation tax will be 25 per cent for UK companies with profits over £250,000. 

The existing rate of 19 per cent will continue to apply for smaller companies whose profits are under £50,000. For any companies with profits in between these thresholds, they will pay tax at a “tapered rate” depending on their level of profitability.

For companies that are part of a group the thresholds will be reduced.

For example, where a UK-company is part of a corporate group with three other “associated companies”,  the upper profit of £250,000 would be divided by four (the UK-company, plus its group members) and therefore would be reduced to £62,500. If its profits in 2023 were £75,000, it would therefore pay corporation tax at 25 per cent.

Adam Dunnett, director at Zefra, says: “Corporation tax has historically been the most 'politicised' of our taxes and Rishi would have been well aware that the news to increase it would steal headlines and result in a much hotly contested debate. 

“It was perhaps an unavoidable choice given the government’s unprecedented level of borrowing during the pandemic. The Chancellor’s claim of it being 'fair and necessary to ask [businesses] to contribute to our recovery' will at least be considered reasonable to some.”

“The headline rate of 25 per cent is still globally competitive and positions the UK as an attractive place to grow your business. 

“The real devil in the detail is how this affects the UK’s 'effective rate of tax' - the actual rate at which companies pay tax - after all of the available reliefs and allowances are taken when working out your taxable profit figure. Delaying the increases until 2023 does at least give companies time and allows some tax planning to take place beforehand.”

Les Cameron, head of technical at Prudential UK, says companies with small profits will see no change; companies with large profits will pay much more tax and the ones in-between will pay more tax than they do currently.  

Additionally, in the mainstream financial planning world this will affect the small business owner, including contractors contracting through personal servicing companies, where an adviser as well as an accountant are involved in how they pay themselves through their business.  

Cameron adds: “Typically, this will be through a small salary within the personal tax free allowance and under the threshold where national insurance is paid, and the balance of their income through dividends to benefit from the lower personal tax rates on these.   

“You must pay corporation tax before you can pay dividends so where people's rates rise they will see a fall in their overall income.  The changes are unlikely to be material enough to move away from a similar small salary/dividend strategy but will make the prospect of diverting some profits toward their pension even more attractive as these will provide corporation relief.”

Richard Taylor, senior wealth planner at Sanlam says: "The fact the government is freezing [corporation tax] for three years, I think most business can get on board with that. It is not an ideal situation but it gives businesses the chance to get their head above water before they have to face that next hurdle in front of them."