2021 Budget: Income Tax, Employment and Share Schemes
Despite the many and much publicised rumours, the Government did not announce any changes to capital gains tax or pensions tax relief.
The other measures in the Budget confirm what has previously been announced, including that income tax rates and allowances will be frozen after the upcoming tax year.
Of most importance to employers impacted by COVID-19 will be the extension of the Coronavirus Job Retention Scheme to 30 September 2021.
Key COVID-19 related measures
Extension of the Coronavirus Job Retention Scheme (“CJRS”)
The Government confirmed that the CJRS will be extended until 30 September 2021. This means that employers will continue to be able to claim grants to cover wages (but not employer NICs or pension costs) for employees who are furloughed (whether on a full or part time basis). The key details are:
- Employees will continue to receive 80% of their usual wages (up to £2,500 per month) for hours not worked
- Until 30 June 2021, employers will receive grants covering 100% of the wages for those unworked hours
- For July 2021, employers will receive grants covering 90%
- For August and September 2021, employers will receive grants covering 80%
The extension of the CJRS will be very welcome news to employers across the UK, particularly those in the most impacted sectors. An extension to 30 September 2021 appears to confirm what many people have thought – that although the current roadmap out of lockdown will end at the earliest on 21 June 2021, the actual easing is most likely to align more closely with the vaccine rollout. Therefore, if businesses are still prevented from opening, they should be able to make use of the scheme (albeit that they will be expected to cover some of the wage costs, in addition to other employer costs, themselves).
Employer reimbursed home working expenses
The current, temporary, income tax and NICs exemption for employer reimbursed expenses for home office equipment will be extended to 5 April 2022. This means that qualifying home office equipment (which does not have significant private use) can be provided tax and NICs free irrespective of whether the employer or employee make the initial purchase.
Without this extension there would have been a difference in tax treatment for work from home equipment directly provided by employers to employees (which can be tax and NICs free) versus that purchased directly by employees and reimbursed (which would otherwise have created a tax and NICs liability) – so this is welcome news, especially with the continued advice to work from home. However, it remains disappointing that the Government has not taken the opportunity to look at reform in this area and the seemingly odd discrepancy in outcomes simply due to the manner in which equipment is purchased and which is also a discrepancy present in the tax treatment of the majority of employment related benefits and expenses.
Enterprise Management Incentives (“EMI”) consultation
At last year’s Budget the Government announced a review of the EMI share options scheme, with particular consideration on whether access should be broadened to help support high growth companies to attract and retain talent. The Government has now announced a call for evidence to look at whether and how to expand the scheme.
The call for evidence has been published here, and will close on 26 May 2021.
Currently the ability to grant EMI options is available only to businesses with less than £30million of assets and fewer than 250 (full time equivalent) employees on a group basis.
Any potential to widen the scope is likely to be welcomed by small, start-up and fast-growing businesses. The use of EMI options is often a critical method of retaining and incentivising key individuals, especially where there may not be sufficient cash to provide bonuses and other market rate remuneration as businesses focus on growth.
Off-payroll working rules (“IR35”) from 6 April 2021
As widely anticipated, there has been no further delay and the rules will come into force on 6 April 2021. The Government announced some small tweaks to the wording of the underlying legislation, but this will not have an impact on the majority of businesses. One of these amendments helps to prevent end users of contractors from facing liabilities when they reasonably relied on information provided to them (by UK-based parties) which later turned out to be fraudulent.
Although some contractors were still hoping for a last-minute reprieve, it would have been very surprising if the rules had been delayed any further. Potentially impacted businesses who are not yet fully prepared will now have a lot of work to do before 6 April 2021. The minor changes are a good sign that the Government has taken on board feedback.
Cycle to work
The Government previously announced a relaxation of the rules for how often employees need to use cycles obtained under the scheme to commute, given the effects of COVID-19. This relaxation will now be legislated and will last until 5 April 2022 for any employees who joined a scheme before 21 December 2020.
This will be welcome news to those impacted. The extension of the easement until 5 April 2022 should provide plenty of time for employees to consider their options in conjunction with any potential changes of their working arrangements in the “new normal”. Employees who are hoping to spend more time working from home will need to consider if the scheme will still be worthwhile for them after April 2022. It is perhaps disappointing that the Government is not proposing to go further and allow the tax-efficient provision of cycles to employees for wider use, especially given the recent focus on the nation’s health.
Employer reimbursed COVID-19 test
The Government previously announced that employer reimbursed COVID-19 tests during 2020-21 would be tax free. This is now being enacted and will apply until the end of the 2021-22 tax year.
Employers will need to ensure that they consider the tax implications for COVID-19 tests. The available exemptions relate to tests that are provided by, or reimbursed by, an employer. The exemption relates to antigen tests (i.e., the “have you got COVID-19” tests), rather than antibody tests (i.e., the “have you had COVID-19” tests).
Pensions tax relief
The Government announced that the Lifetime Allowance for pensions (the maximum value of an individual’s pension pots before incurring additional taxes, up to a potential rate of 55%) will be frozen at its current level of £1,073,100 until April 2026.
Despite previous and widespread speculation that there may be wholesale reforms (and potential large reductions) to pensions tax relief, this is a relatively minor change. As with other “freezes” announced in the Budget it is, in real terms, a tax rise. Individuals with pension pots approaching the limit will need to consider their options carefully if they want to avoid potential penal tax charges.
This measure will be particularly disappointing for individuals who are near their annual allowance and expected their pots to keep pace with inflation. They will find the withdrawal of an inflation linked increase may give them an unavoidable tax burden.
Income tax rates and allowances
The Government had previously announced that the personal allowance (the amount of income which is tax free for those with income of no more than £100,000) would receive an inflationary increase to £12,570 (from £12,500), and that the basic rate band (the amount of income taxed at 20%) would receive a similar increase to £37,700 (from £37,500).
The Government announced that there will be no further inflationary increases and both of these will now be frozen until April 2026.
As with previous years, the personal allowance continues to be reduced by £1 for every £2 of income over £100,000. This means that an individual with an income of £125,140 or more will receive no tax free personal allowance and that income between £100,000 and £125,140 is taxed at an effective rate of 60% (accounting for the 40% higher tax rate, and the loss of the tax free allowance combined).
|The 2021-22 tax rates for England, Wales, and Northern Ireland will be:|
|Personal allowance (unless reduced)||£12,570|
|After deducting the personal allowance, the remaining income is subject to tax at progressive rates:|
|Basic rate band (income taxed at 20%)||£0 - £37,700|
|Higher rate band (income taxed at 40%)||£37,701 - £150,000|
|Additional rate band (income taxed at 45%)||£150,001+|
The dividend rates remain unchanged at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers, and 38.1% for additional rate taxpayers. The dividend allowance (the amount of dividends that can be received tax free) remains unchanged at £2,000.
The personal savings allowances (the amount of savings income that can be received tax free) also remains unchanged. The personal savings allowance for basic rate taxpayers is £1,000, for higher rate taxpayers it is £500, and there is no allowance for additional rate taxpayers.
National Insurance Contributions (“NICs”) rates and allowances
The rates of NICs payable by employees and employers remain unchanged.
For employees, earnings between the primary threshold and the upper earnings limit are subject to NICs at 12%, and earnings above the upper earnings limit at 2%.
For employers, earnings above the secondary threshold are subject to NICs at 13.8%.
Using annualised weekly limits, the threshold at which employees begin to pay NICs (the primary threshold) increases from £9,516 to £9,568. The threshold at which employers begin to pay NICs (the secondary threshold) increases from £8,788 to £8,840. The upper earnings limits (from which point employees pay NICs at the reduced rate of 2%) increases from £50,024 to £50,284 (keeping in alignment with the point at which most individuals start paying tax at 40%, if they are entitled to a full personal allowance).
Although announced as a “freeze” the fact that the personal allowance and basic rate band will not receive inflationary increases before April 2026 is, in effect, a tax rise. As wages hopefully keep pace with inflation, individuals’ taxable earnings will rise and they will find more of their earnings subject to tax, and potentially at a higher rate. Looking at the impact report produced, the exchequer expects to receive an additional £19 billion in total by the April 2026 – a clear indication of the impact to individuals, and one that will be most widely felt by those earning less than £100,000 (given they maintain their entitlement to the full personal allowance).
The continued freeze on the personal savings allowance and dividend allowance has the same effect and will help make ISAs look as attractive as ever (despite some previous claims that the personal savings allowance could sound the death knell for ISAs).
Capital Gains Tax (“CGT”) rates and allowances
The rates of CGT remain unchanged, and the annual exempt amount (currently £12,300) has been maintained.
Despite many rumours, the Government has not (yet) pressed ahead with any changes to CGT rates – something that will be welcome news to those expecting to incur gains during the next tax year.
Other personal tax allowances
The ISA annual subscription limit is frozen at £20,000 and the Junior ISA annual subscription limit is also frozen, at £9,000.
The freezing of these allowances follows the common theme of the Budget – letting inflation take away the value of reliefs and allowances, rather than actively reducing them.
Extension of the Self-Employment Income Support Scheme (“SEISS”)
In addition to the extension to CJRS (above), the Government confirmed that the SEISS will be also be extended until 30 September 2021, and will now be widened to include those who have filed their 2019-20 tax returns (as long as this was done by 2 March 2021) if they were not previously eligible.
The scheme will continue to be subject to the current caps and other eligibility criteria:
- The 4th grant will cover 80% of profits for February to April 2021 and can be claimed from late April
- The 5th, and final, grant will cover 80% of profits for May to September 2021 for businesses whose turnover has fallen by 30% or more, or 30% of profits for businesses whose turnover has not fallen as much, and can be claimed from late September
The extension will be welcomed by self-employed individuals, particularly by those who missed out on previous grants due to not having been self-employed for long enough.
There will still be some disappointment – for those that have not managed to get their tax returns in yet, and particularly for those that became self-employed from 6 April 2020 onwards.
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