Budget 2021: Here is what Chancellor Rishi Sunak announced
Rishi Sunak delivered his much anticipated Budget today. David Prosser explains what it means for you.
Anyone planning to raise a glass to Chancellor Rishi Sunak’s Budget should fill it with draught beer or sparkling wine rather than a strong red or a high-strength cider. His rationalisation of alcohol duties will reduce tax on the former – taking 3p off the cost of a pint, for example – but make higher-alcohol drinks more expensive.
It’s a common theme in this year’s Budget. The Chancellor is cutting air passenger duty in half, to just £6.50 on domestic flights, but introducing higher rates on longer trips, including a new £91 duty on ultra-long-haul flights. On fuel duties, he is freezing tax for the 12th year running, but actively spending money on electric vehicles, with £620m for public charging points.
Personal finances under pressure
In truth, these adjustments are minor, particularly in the context of the way in which the rising cost of living – inflation is now expected to average 4% next year – is hitting people’s personal finances. Here, the Budget confirmed some support for those on low incomes, including an increase in the minimum wage to £9.50 and a smaller reduction in universal credit as claimant’s income rises. But these won’t be enough to fully protect families from higher prices, or compensate in full for the end of the £20 universal credit top-up for those affected. Nor is there is any additional help for those on average earnings or more.
Indeed, millions of people will be worse off when the Chancellor raises national insurance contributions by 1.25 percentage points next April to pay for NHS and social care funding. And the Budget confirmed that income tax thresholds will be frozen until the 2025-26 tax year, guaranteeing higher tax bills for those whose earnings rise.
For savers, there is not too much to get excited about in this Budget. The individual savings account (Isa) allowance will remain at £20,000 in 2021-22, while child trust fund and Junior Isa allowances will remain at £9,000. Savings below £5,000 will continue to qualify for the nil rate income tax band. Similarly, the capital gains tax system is unchanged and there are no adjustments to inheritance tax.
On pensions policy, the Chancellor was not keen to talk about the Government’s manifesto promise of a triple-lock increase in state pensions, which he suspended for the 2022-23 tax year in September. Budget documents reveal this change will save £5.4bn next year – but even more in future tax years, because state pensions will then rise from a lower base even after the triple lock returns.
As for private pensions, the Chancellor has followed the example of his predecessors, resisting the temptation to raise money by changing tax reliefs on pension contributions. Savers will be entitled to claim relief at their highest marginal rate of income tax, up to the annual allowance on contributions – the lower of £40,000 or your annual earnings for most people.
Still, two small-print changes could prove significant. First, Sunak is promising to look at waiving the maximum charge pension fund providers can levy on workplace pensions, so they can launch investment products in areas such as infrastructure. That could see some pensions become more costly, but also give savers a wider choice of investment funds. Second, the Chancellor is to close the “net pay anomaly” which makes it difficult for many low earners to claim the 20% tax boost on their pension contributions that everyone is in theory entitled to. That’s good news for savers on lower incomes, though the rules won’t change until 2024.
Business rates help for some small businesses
If the Chancellor was sparing with Budget measures affecting people’s personal finances, he also surprised entrepreneurs and small businesses with fewer changes than they might have expected.
For example, many businesses had hoped for an overhaul of the business rates system, but the Chancellor wants to finalise plans for new online sales taxes first. Still, for businesses occupying physical premises, next year’s freezing of the multiplier applied to business rate calculations will be welcome. And a new 50% relief for the retail, leisure and hospitality industries is aimed at those sectors hit hardest by the Covid-19 crisis. There is also additional support in the form of tax breaks on property improvements, particularly for green modifications.
Other support that could prove to be valuable to small businesses include the annual investment allowance, where the £1m yearly limit on tax-efficient investment in plant and machinery will be extended until 2023, and the continuation of the “super deduction”, which allows businesses to reduce their taxable profits when making investments. Nor will businesses with profits below £50,000 be subject to the new 25% corporation tax coming into force in 2023; they will continue to pay 19%.
On the downside, however, small businesses will see wage bills increase next April, as the minimum wage rises to £9.50 an hour and the 1.25 percentage point increase in employers’ national insurance contributions comes into effect.
Self-employed face higher tax bills
Self-employed workers also face the national insurance increase next year and will be disappointed to see no reforms to the IR35 system – blamed in part for labour supplies in many industries because self-employed workers are finding it difficult to comply. The Budget also confirmed the Chancellor is going ahead with the “base period reforms”, which affect how self-employed workers and partners file their tax reforms; this will raise £1.7bn over the next four years.
In addition, some campaigners are angry that the self-employed income support scheme, offering financial support to those hit by the pandemic, has not been extended. The Recovery Loan scheme, by contrast, has been extended beyond its 31 December cut-off point to 30 June, offering advances of up to £2m per business.
Finally, if you’re thinking about starting up a business, make sure you consider a wide range of funding possibilities. The Budget includes an extension of the Start-up Loans Scheme – through which entrepreneurs can borrow up to £25,000 for new ventures – for three more years.