Important Tax Changes from April 2021
The main economic thrust of the budget on 3 March 2021 was Covid measures and how economic policy could support the UK recovery and there were not a lot of changes announced which will impact on you directly.
However, there are many measures that were announced in previous budgets which now start in April 2021. We have summarised the main points below.
IR35 – Off payroll working
The IR35 rules continue as normal. The fundamental change here is where the potential liability for payroll taxes falls, should HMRC dispute your status. From April it could be on your client and as a result many larger companies are blanket-banning contractors. If this change impacts on you and you are having to move to PAYE or an umbrella company, there will be fundamental changes to your existing company.
The first change will be that you should stop your payroll from 31 March 2021. If we run your payroll for you, you MUST let us know that this has impacted on you, so we can cease it.
HMRC CEST tool may be useful if you are currently discussing this with your clients.
Other tax planning opportunities are available on the closure of the company, especially as the rumoured changes to Capital Gains Tax did not materialise. Please contact us if you would like to explore these.
This remains at 19%, but will increase after 01 April 2023
- It will change from 19% to 25% from 1 April 2023.
- This higher rate will apply where company profits are in excess of £250,000, with the low rate of 19% being retained for those with profits under £50,000. For those companies with profits between £50,000 and £250,000, there will be marginal relief applying to bridge the gap between the lower and upper limits.
- These limits will be divided by the number of associated companies; in other words, where one company controls another or both are under the same control. There are increased tax allowances from April 2021 (the “super-deduction”) on certain classes of assets that can be claimed, which will reduce the Company tax by around 25p for every pound invested in qualifying new equipment, and which we will claim as part of the corporation tax work we do for you.
- Companies making trading losses in 2020/21 and/or 2021/2022 will be able to carry back these losses for up to three years to offset against taxable profits.
Furlough scheme extension
The government is extending the CJRS for a further five months from May until the end of September 2021.
Employees will continue to receive 80% of their current salary for hours not worked. There will be no employer contributions beyond National Insurance contributions (NICs) and pensions required in April, May and June.
From July, the government will introduce an employer contribution towards the cost of unworked hours of 10% in July, 20% in August and 20% in September, as the economy reopens.
Self-employed Income Support Scheme
The government confirms that the fourth SEISS grant will be worth 80% of three months’ average trading profits, paid out in a single instalment and capped at £7,500 in total.
The grant will cover the period February to April, and can be claimed from late April. Self-employed individuals must have filed a 2019- 20 Self-Assessment tax return to be eligible for the fourth grant.
This means that over 600,000 individuals may be newly eligible for SEISS, including many new to self-employment in 2019- 20. All other eligibility criteria will remain the same as the third grant.
The government also announces that there will be a fifth and final SEISS grant covering May to September. The value of the grant will be determined by a turnover test, to ensure that support is targeted at those who need it the most as the economy reopens.
People whose turnover has fallen by 30% or more will continue to receive the full grant worth 80% of three months’ average trading profits, capped at £7,500. People whose turnover has fallen by less than 30% will receive a 30% grant, capped at £2,850. The final grant can be claimed from late July.
Stamp Duty Land tax
The government will extend the temporary increase in the residential SDLT Nil Rate Band to £500,000 in England and Northern Ireland until 30 June 2021. From 1 July 2021, the Nil Rate Band will reduce to £250,000 until 30 September 2021 before returning to £125,000 on 1 October 2021.
Setting the best level for your salary for 21/22:
A. If you run your own payroll
You will need to set your salary at £9,568 (up from £9,500) gross per annum or £12,570 (up from £12,500) gross per annum depending on your individual circumstances and pay the net salary and taxes as they are calculated. See below for additional guidance.
B. If we process your payroll
We will soon email you the March quarter payroll. There WILL be some National Insurance payable to HMRC this quarter. Details of how and what to pay will be with the payroll reports, please check these reports when you receive them. Whilst there is some NI due this is lower than the combination of corporation and dividend taxes and is part of your tax planning. Do not forget to pay this.
To minimise the taxes due, you should set your 2020/21 take home salary at:
- If you currently have a standing order paying £792 salary from the company to you each month, then you should increase this to £797.34. Note because the chancellor has split the National Insurance bands there will be a small amount of National Insurance due in March 2022 similar to this year and we will let you know this amount in due course.
- If you have a £1,011 net salary this should be increased to £1,017.48.
We will process your 20/21 payroll at the new levels indicated above. When you receive the first quarterly payslips please check that these agree to the payments you are making and if not, let us know of any discrepancies so they can be adjusted.
- If your salary is now £797.34 per month you can then take £5,002 of dividends per annum tax free. There is then tax payable at 7.5% on the next £35,700 of dividends. The dividend tax rate then increases to 32.5%.
- If your salary is £1,017.48 per month you can then take £2,000 dividends per annum tax free. There is then tax payable at 7.5% on the next £35,700 of dividends. The dividend tax rate then increases to 32.5%.
If you have other income this will reduce the bandings accordingly.
The 32.5% band continues until your total income reaches £100k then the % rises again.
Top Tax Director/ Shareholder tips to consider:
- If you have not already, you may want to transfer some shares to your spouse to reduce dividend tax.
- If you are the sole director/employee and take on another employee who is paid at the level where NIC is due, you should increase your salary to £12,570 per annum as this will reduce taxes as you can claim the Employer’s NI allowance.
The Marriage Allowance
The Marriage Allowance lets you transfer £1,260 of your Personal Allowance to your husband, wife or civil partner. If they earn more than you, this reduces their tax by up to £252 in the tax year. To benefit as a couple, the lower earner must have an income of £12,570 or less. Also, neither of you can be a higher rate tax payer.
2020/21 Pension Payments
If you are considering making a further personal pension payment, you may wish to do this before 5th April 2021 as it will extend your basic rate tax band and allow additional tax relief. There are various limits and rules surrounding pensions and if you are considering making a large contribution then you need to check you comply.
If you run your own company, your company can make the contribution, which may allow you to make higher additional payments up to £40,000 per annum plus unused relief brought forward. If you are considering this you should contact your pension advisor and let us know the contribution in due course. Remember that the tax relief on pension contributions is given in the year that the contributions are actually paid.
Construction Industry subcontracts and VAT:
Construction Services Domestic Reverse Charge (“CSDRC”)
This was scheduled to begin in October 2019. This was delayed a year and has taken effect from March 2021. The rules are: a person supplying certain construction industry services to a VAT-registered customer will no longer be required to charge VAT. Instead, the customer will account for VAT under a “reverse charge” arrangement. That is, the customer will account for VAT as if he had himself made the supply (to himself) and will also, if and to the extent appropriate, recover the same VAT as input tax. HMRC have introduced this to minimise VAT fraud, to remove any risk to them that there may be deducted as input tax an amount which has never been paid over as output tax.
The CSDRC applies only to supplies which would otherwise be subject to VAT at the standard or reduced rate. It does not, for example, apply to zero-rated supplies or supplies made by someone who is neither registered nor required to be registered for VAT (for example, where the supplier is below the VAT registration limit).
The list of services to which the CSDRC applies (“construction services”) has a familiar ring—they are the same services as those to which the Income Tax Construction Industry Scheme (“CIS”) applies. They thus extend not only to construction but to alteration or repair of buildings, some types of electrical and plumbing work, site clearance etc. The CSDRC also extends to any goods or materials supplied in conjunction with “construction services”.
You may be able to further defer VAT payments. The portal is now open for applications to defer 2020 VAT payments due by 31 March 2021 until March 2022. Further details can be found at GOV.UK. Applications must be submitted by 21 June 2021
Tax bands (*Scotland varies)
Your tax-free personal allowance has increased slightly to £12,570
The point where high-rate tax comes in has increased slightly to £50,270
Your national insurance now starts at £9,568
Allowances you can claim
Here are a few of the allowances you can claim to help reduce your tax:
- The first £2,000 of dividends are tax free
- The first £1,000 of interest is tax free (if you are a low-rate tax payer)
- The first £12,300 of capital gains you make are tax free
- You may be able to claim a trading allowance of £1,000 if you are self employed
- You may be able to claim a rental allowance of £1,000 if you rent property
- Your income tax allowance is £12,570
- You can claim rent a room allowance of £7,500
- Marriage allowance, as above £1,260.
Allowances you can lose
If your income is more than £100,000, your Personal Allowance goes down by £1 for every £2 that your income exceeds this threshold. This means your allowance is zero if your income is £125,000 or above.
High Income Child Benefit tax charge is worked out on the highest income of the two spouses. If one of them exceeds £50,000 per annum, this tax charge will be triggered and part or all of your claim will be payable when your individual income exceeds £60,000.
Further tax tips
This blog includes advice that is generic in nature and should not be interpreted as legal advice. Please contact us for specific and confirmed tax planning advice.