The Government introduced various schemes that have supported some businesses and individuals through the COVID 19 pandemic. The big question on many people’s minds has been “How will this be paid back?”. Some of this became clear in the budget announcements on 3rd March.
One of the biggest announcements was the news that the main rate of corporation tax will increase from 19% to 25% from 1 April 2023. Alongside this announcement was the introduction of a small profits rate of 19% to provide protection to the smallest businesses. This is a return to the days of pre-2015 where we had two rates of corporation tax and marginal relief to worry about.
The draft finance bill published on 11 March provided us with some key detail on what is proposed. When the rates apply will depend on the “augmented profits” of a company for the relevant accounting period. Broadly speaking, augmented profits are taxable profits plus any exempt distributions such as dividends.
The small profits rate of 19% will apply where such profits for the accounting period do not exceed the lower limit of £50,000, with the main rate of 25% applying where augmented profits for the accounting period exceed the upper limit of £250,000.
So, what about the companies whose profits fall between £50,000 and £250,000? For these companies’ tax is calculated at the main rate then marginal relief applies to reduce the liability. Marginal relief bridges the gap between the lower and upper limits providing a gradual increase in the corporation tax rate. There will be an updated calculator on www.gov.uk to enable you to work out the marginal relief.
If you did want to take the time to work this out manually, I have included a sample calculation below to show how this will work.
In this example the company is a standalone company with augmented profits of £100,000. As this is in between the £50,000 and £250,000 rates marginal relief will apply
The marginal relief is calculated as F x (U-A) x N/A, where:
F is the standard marginal relief fraction (3/200)
U is the upper limit
A is the augmented profits
N is the total taxable profits
In this example the tax liability would be as follows:
100,000 x 25% = 25,000
Less marginal relief 3/200 x (250,000-100,000) x 100,000/100,000 = (2,250)
Corporation tax liability = 22,750
The reintroduction of a two-rate system also means the reintroduction of the concept of associated companies. Where a company has one or more associated companies, the upper limit of £250,000 and lower limit of £50,000 are divided by the number of companies.
Broadly, speaking two companies are associated where one has control of the other or where both are under the control of the same person or persons.
Taking the example above, let’s say that company A has one associated company, company B. The upper and lower limits would be reduced to £125,000 and £25,000 respectively. On the same profits of £100,000 the corporation tax liability would therefore increase to £24,625.
There is a little good news.
The Government are to temporarily extend the period in which both incorporated and unincorporated businesses can carry back trading losses from one to three years. This extension is limited to £2m of unused trading losses made in 2020/21 and 2021/22. Associated companies will have to apportion the cap.
The repayment of business rates relief by some businesses will be tax-deductible as the original expense would have been an allowable expense to the company concerned.
The Government have gone further to help businesses who are looking to make capital investments between now and March 2023 with the introduction of the super deduction. For those items that qualify for first year allowance (FYA) the rate of relief will be 130%. Those items not qualifying for the FYA receive a special rate relief in the first year of 50%. The temporarily increased limit of £1m for annual investment allowance (AIA) will also be extended for another year to December 2021.
So, what is the news for personal tax?
The Government announced that the personal allowance for 2021/22 would increase in line with the CPI (Consumer Prices Index) rate of September 2020, these rates are:
Personal allowance £12,570 0%
Basic rate threshold £37,700 20%
Higher rate threshold £50,271 40%
Additional tax rate £150,001+ 45%
Tax on dividends is slightly different as detailed below:
First £2,000 (this is in addition to your personal allowance) tax-free
Basic rate (up to £50,270) 7.5%
Higher rate (£50,271 – £150,000) 32.5%
Additional rate (over £150,000) 38.1%
These rates are frozen for now and will remain in force until the 2025/26 tax year. National Insurance limits will remain aligned to the tax thresholds for this period.
Taxation on self-employed income support scheme grants or SEISS as it is known, from April 2021, is to be taxed in the year of receipt. It is important to note that the Government has updated the finance act 2020 to specify that an individual will be subject to a 100% tax charge if they receive a SEISS Grant payment which it later transpires they were not entitled to. This measure will allow HMRC to recover payments in full from all those individuals who made a claim that did not meet the criteria of said grant.
If your tax return is amended on or after 31st March which lowers your turnover you must inform HMRC within 90 days. If you feel that you may be affected by this you can contact HMRC and volunteer to repay the grant, you do not have to inform them, however, if the eligible amount had reduced by £100 or less. If you do not inform HMRC within the 90-day deadline you may incur a penalty.
On a lighter note, the ISA annual subscription limit has remained unchanged at £20,000 with the limit for junior ISA’s also remaining the same at £9,000, this limit also applies to Child Trust Funds.
This article by no means covers all the tax changes that are coming into force this year, but is intended to give the reader an overview of the main points that will have an effect on most businesses and individual taxpayers.