Chancellor Rishi Sunak published the second full Budget since the start of the Coronavirus outbreak on Wednesday 3 March 2021.
So, what does it mean for the UK’s taxation landscape? Almost 12 months on, the Budget laid bare the economic impact of COVID-19 and how Sunak intends to get economic recovery and growth underway.
Here’s our summary:
Unprecedented Level of Public Spending and Borrowing
Sunak took pains to lay out the context of government expenditure which includes:
- More than 700,000 people losing their jobs;
- The economy shrinking by 10% – the largest fall since 1709; and
- Borrowing is highest it has been outside of wartime.
The Chancellor frequently stressed the “acute” damage COVID-19 has had on the country, not least its finances, which hints at difficult decisions – political speak for higher taxes – in the years ahead.
- Total Covid support package this year and next is £352bn
- Sunak says the response to the pandemic has been one of the largest and most sustained the country has ever seen.
Highly unusual for a Conservative Chancellor to brag about the level of public spending but this is an unprecedented boast for unprecedented times.
Unprecedented Level of Public Borrowing
The Chancellor stressed the unprecedented level of public borrowing in response to the pandemic. The budget deficit will be £355bn this year, or 17% of GDP – the highest level in peacetime.
Sunak stated that without corrective action, borrowing would continue at very high levels, leaving underlying debt rising indefinitely. He argues that the corrective actions set out in the 2021 Budget borrowing will fall to 4.5% of GDP in 2022-23, then to 3.5% in 2023-24, then 2.9 and 2.8% in the following two years.
He feels the borrowing levels are justified as COVID-19 has caused one of the largest and most sustained economic shocks ever seen and he feels the UK government has had one of the largest, most comprehensive and sustained responses.
“Every Job Lost Is A Tragedy”
The Chancellor credits the actions undertaken by the Treasury office in March of last year – and the unprecedented programme of government support – as key to ensuring many individuals and businesses have survived.
As a result of this the Office of Budget Responsibility (OBR) expects the UK’s economy to return to pre-pandemic levels by the beginning of next year and 1.8 million fewer people are out of work than first forecast.
Key support mechanisms are due to be extended into the upcoming tax year:
- The furlough scheme will be extended until the end of September.
- Employees will continue to receive 80% of their wages until the scheme ends, but firms will be asked to contribute 10% in July and 20% in August and September as the scheme is gradually phased out.
- The self-employment income support scheme has also been extended. The fourth grant will cover February to April, worth 80% of average trading profits up to £7,500.
- Where previously, newly self-employed individuals were denied access to the scheme, it has now been opened to them – as long as they filed their tax returns by midnight 2 March 2021.
- The £20-a-week increase in universal credit is extended for six months.
- Furthermore, the incentive grants awarded to employers to encourage them to take on new apprentices have been doubled to £3,000.
These support schemes are combined with grants to reignite and reinvigorate the economy once lockdown has been lifted. These include:
- A £5bn restart grant for businesses to help companies get going after lockdown;
- Total direct cash support to businesses has reached £25bn.
- As the government-backed bounce back loan (BBL) and coronavirus business interruption loan scheme (CBILS) come to an end, the Treasury is launching a new loan scheme to run until the end of the year. Loans can be between £25,000 and £10m and the government will guarantee 80% of the loan.
- Hospitality and leisure businesses pay no business rates for three months, then rates will be discounted for the remaining nine months of the year by two-thirds, in a £6bn tax cut.
- 5% reduced rate of VAT will be extended until the end of September. Then it will be gradually increased, at 12.5% for six months, before returning to the standard rate from April 2022. This cut is estimated to be worth £5bn.
Commitment to Transform Generation Rent to Generation Buy
As our lives have shifted to working, schooling and socialising from the comfort of our homes the phrase an “Englishman’s home is his castle” has never been more relevant!
The property market over recent months has reflected this social change and – spurred on by the £500,000 Stamp Duty Land Tax (SDLT) nil rate band announced in last year’s budget the chancellor has made the following announcements:
- SDLT holiday on properties up to £500,000 continues until the end of June. It will be kept at double its standard level until the end of September (up to £250,000), and then return to usual levels from 1 October.
- The government will offer a mortgage guarantee to help first-time buyers access 95% mortgages.
Whilst on the one hand the extension to the SDLT Nil-Rate-Band holiday is a welcome addition to the Budget to prevent a “cliff edge” effect on the property market, there may be false economies at work here as prices keep increasing to a disproportionate level when compared to the SDLT saving.
Personal Tax Rates Are Frozen
Despite being subject to feverish speculation as to the introduction of a Wealth Tax, increases to Capital Gains Tax and Inheritance Tax and abolishment of Entrepreneurs’ Relief – these taxes were unscathed by the 2021 Budget – meaning the Tories’ triple lock income tax, National Insurance Contributions and VAT remains intact.
However, the majority of Allowances have been frozen until 2026 and many individuals may pay more tax overall once inflation is considered:
- The government will not raise national insurance, income tax or VAT, but will freeze personal tax thresholds;
- The personal allowance will remain at £12,750 until 2026. The higher-rate threshold will increase to £50,270 next year, and also remain at that level.
- The inheritance tax threshold, pensions lifetime allowance, annual exempt allowance from capital gains tax and VAT exemption threshold will also all be frozen.
This is tax by stealth – it is politically expedient to defer benefit as opposed to imposing an immediate charge.
“Now We Will Ask More of Those Who Can Afford”…
Most explosive and significant weapon in Sunak’s armoury was amendments to Corporation Tax regime:
- In April 2023, the rate of corporation tax will increase to 25%. Sunak says this will be the lowest rate in the G7.
- Sunak says businesses will only be impacted if they are making profits, and the change will only come in once the OBR forecasts the economy will be recovering.
- The rate will be tapered so that only businesses with profits of more than £250,000 will be taxed at the full 25% rate; that means only 10% of companies will pay the full higher rate. Companies with profits of less than £50,000 will remain at 19%.
- “It’s a tax rise on company profits, but only on the larger more profitable companies, and only in two years’ time,” Sunak says.
- The government is investing £25bn by allowing a 130% super-deduction on tax for investments made by companies. This means firms can cut their taxes by up to 25p for every pound they invest.
Sunak stressed that an increase of Corporation Tax to 25% would still be competitive internationally and will be the lowest rate in the G7, however, this still represents a substantial increase for many businesses.
There is a perception that the corporate world is populated with faceless conglomerate Scrooges hellbent on heartless capitalist exploitation at whatever cost. However, many of these companies will be family run, family centred and provide entrepreneurial backbone to this country. Company profits of £50,000 are very modest in the context of the UK’s economy and many companies – which includes estate agents, hairdressers and start ups of the future – will be hampered by this increase.
Noticeable in its absence was a higher tax rate for the digital economy for firms such as Amazon, Netflix and online delivery companies who have profited enormously from COVID-19. In terms of asking more “of those who can afford” it seems they will ask substantially more of some rather than others.
A United Response
As the prospect of a second Scottish Referendum rears its head once more, the Chancellor highlighted the government’s commitment to the United Kingdom, emphasising not only the importance of a united front in the battle against COVID-19 but going forward for the sake of our economic recovery:
- Treasury will establish an economic campus in Darlington, alongside the business, international trade, and housing and communities departments among others.
- More than £1bn funding for 45 new “town deals” across the UK.
- Freeports – special economic zones with different rules to make it easier and cheaper to do business – will be launched. They will include infrastructure planning, customs and favourable duties and taxes.
- Sunak announces eight locations in England: East Midlands airport, Felixstowe and Harwich, Humber, Liverpool city region, Plymouth, Solent, Thames and Teesside.
The Chancellor laid out the ravages of COVID-19 as a battleground equal to the crisis faced in World War II. His response was Churchillian: the role of any government is “To do what must be done when the danger is imminent and no-else can”.
He outlined these battlelines; emphasising the unprecedented level of government spending and borrowing in recent months and the Treasury’s stated commitment to utilise the “full measure of fiscal firepower”.
The rhetoric may be grand and sabre rattling however, the measures to achieve that aim are so far conservative. It appears increased taxes are inevitable in the years to come.
If you have any specific questions our tax team are always readily available to support. Contact us: email@example.com
Our debrief webinar recording can be found here: https://www.youtube.com/watch?v=YbqdqJdMr3Q
Download our full Budget Summary Guide below: