Autumn Budget Personal Tax Predictions – By Matt Herd
The 2021 Autumn Budget will be delivered on 27th October. This will be the second Budget in 2021, following the March Budget and will be Rishi Sunak’s third Budget since becoming Chancellor.
Many of the Coronavirus support schemes introduced since the beginning of the pandemic have now ended and it will be interesting to see whether the Chancellor believes that now is the right time to start introducing personal tax increases to help repay the government borrowing.
Any announcements that reduce household income will be particularly unwelcome given the withdrawal of the £20-a-week Universal Credit uplift and rising gas bills.
Health & Social Care Levy
The government have already announced a 1.25% increase to National Insurance from April 2022 to go towards funding the NHS and addressing the social care crisis. The dividend tax rate will increase by 1.25% at the same time.
The National Insurance increase will be replaced by a 1.25% Health & Social Care Levy from April 2023.
The National Insurance increase will affect employers, employees and the self-employed. Those working beyond state pension age will also have to pay the new levy. Individuals who only pay Class 2 and Class 3 National Insurance contributions will not be affected.
Although it has yet to be confirmed, it is believed that the levy will not apply to pension income.
Capital Gains Tax (CGT)
In the March 2021 Budget, the Chancellor announced that several tax thresholds are to be frozen until 2026 to help fix public finances in the wake of the pandemic including the CGT annual allowance.
There is speculation that further changes to CGT rules may be introduced including increases to the rates and/or the restriction of reliefs. Rishi Sunak ordered an urgent CGT review from the Office of Tax Simplification (OTS) in July 2020. Proposals made by the OTS included aligning CGT more closely with income tax rates and reducing the CGT allowance from £12,300 to between £2,000 and £4,000. As part of his Budget, the Chancellor may confirm whether any of these proposals are to be implemented.
The government has also confirmed that the state pension ‘triple lock’ will be suspended for a year. The triple lock guarantees that the state pension will increase every year by the highest of:
average wage earnings growth and,
The Coronavirus Job Retention Scheme (furlough scheme) has seen earnings growth reach an unusually high 8%. Therefore, that element of the lock has been removed.
Making Tax Digital (MTD) for Income Tax
It was announced last month that MTD for income tax will be delayed by a further year.
MTD for income tax will now be introduced from April 2024 for sole traders and landlords. General partnerships will not be required to join MTD until April 2025
Under the requirements of MTD for income tax, Self-employed businesses and landlords with annual business or property income above £10,000 will be required to keep their accounting records electronically and file quarterly returns to HMRC with details of their income and expenditure together with any other information that HMRC specifies. A final end of period statement will then be submitted after the tax year to complete the individual’s tax affairs.
Although the frequency of reporting is to change, the timing of tax payments will not and the current system of payments on account and balancing payment by 31 January after the tax year is currently expected to remain in place.
Student loan repayment threshold
Finally, it is understood that Rishi Sunak may be planning to overhaul the student finance system.
The government reportedly plans to reduce the earnings threshold at which students must begin to repay their student loans. Currently, students begin to make repayments once their annual earnings reach £27,295.
Having already given one set of Budget predictions in 2021, back in March, I had thought that my writing for Business Weekly was done for the year. Indeed, following a Spring Budget packed with tax announcements (at least from a corporate and business tax perspective), many expected Rishi Sunak’s second ‘big’ speech of 2021 to revert to the format of the traditional Autumn Statement, providing an economic update and spending review, but stopping short of a full Budget speech. However, having announced this Autumn speech as a full Budget and having brought the date forward from its usual late November/early December slot, I suspect the Chancellor may still have plenty up his sleeve in terms of changes to tax policy as the Government attempts to rebuild public finances in the wake of the Coronavirus pandemic.
All that said, I would be surprised if we see any more substantive increases to headline rates of tax, particularly following the impending rises to National Insurance and Corporation Tax already announced. Instead, what I suspect we’ll see is the introduction of a raft of ‘simplification’ measures, marketed as changes to the tax system designed to help taxpayers remain compliant with their obligations, but what are, in reality, methods of accelerating tax revenues for the Exchequer.
One such example of this is the proposed reform to basis periods for the self-employed, which has been badged as a simplification to the system of allocating trading income to tax years that should aid sole traders and partnerships with the move to Making Tax Digital for Income Tax. However, the reality is that in the year of transition to this new regime, many businesses will see their profits and corresponding tax liabilities accelerated, with a potentially significant impact on cash flow.
Other areas that are ripe for ‘simplification’ are Capital Gains Tax and Inheritance Tax, particularly with regard to the availability of Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) and Business Property Relief respectively, so we may also see announcements that increase future revenues without raising the headline rates of tax in these areas.
I also expect the Chancellor to continue to target aggressive tax avoidance and evasion, particularly in the context of pandemic support measures, and, given the revenue raising success of previous HMRC campaigns, it’s possible that we may see a specific disclosure facility launched to deal with ‘errors and mistakes’ made by businesses that took advantage of the various Coronavirus grants, loans and the furlough scheme.
Finally, I expect climate measures to be high on the agenda ahead of COP26 and the Government’s pledge to make the country carbon neutral by 2050. Whilst the idea of some form of ‘carbon tax’ has been mooted for certain carbon-intensive industries, I suspect any climate-related announcements are more likely to take the form of new and enhanced tax incentives for green technologies and initiatives.