Facts about UK Budget 2021: Many will pay income tax more and Everything You need to Know
Facts about UK Budget 2021: Many will pay income tax more and Everything You need to Know

More than one million more people will have to pay income tax in the next five years, forecasts have said, after Chancellor Rishi Sunak froze thresholds in a bid to recoup some of the hundreds of billions spent during the coronavirus pandemic.

While technically the Government hasn't raised tax rates today, its decision to freeze thresholds means many who get a wage rise - even if it's just in line with inflation - will end up paying more in income tax because they're drawn into a higher tax bracket. For example, some non-taxpayers will start paying 20% on a bit of their income, and some 20% taxpayers will start paying 40% on a bit of their income - whereas if thresholds had continued to rise in line with inflation, they'd have remained in the same tax bracket.

He said the threshold at which people start paying income tax will freeze until 2026, after increasing to £12,570 in April - meaning more people will be dragged into paying tax as wages increase.

The higher rate threshold will similarly be increased next year, to £50,270, and will then also remain at that level for the same period," the chancellor said, meaning more people will eventually be in the highest bracket.

The Office for Budget Responsibility (OBR), a government body set up to provide independent economic forecasts, said the move to freeze income tax thresholds will bring 1.3 million people into the tax system and create one million higher rate taxpayers by 2025-26.

The chancellor also made a number of spending pledges in his Budget, providing an additional £65 billion to support Britons through to the end of lockdown and beyond.

A new "small profits rate" will maintain the 19% rate for firms with profits of £50,000 or less - meaning around 70% of companies - 1.4 million businesses - will be "completely unaffected" by the tax hike.

Mr Sunak said this will help protect small business owners, while reclaiming more in profit from the biggest firms.

And there will be a taper above £50,000, so that only businesses with profits of £250,000 or greater will be taxed at the full 25% rate - around 10% of firms.

Mr Sunak said: "So yes, it's a tax rise on company profits. But only on the larger, most profitable companies. And only in two years' time."

But he said he would also need to be "honest" that coronavirus had "hit the economy hard" and he must start clawing back some of the £407 billion that has been spent in total during the pandemic.

The chancellor said he would also be increasing the business tax rates from 19% to 25% in 2023.

Mr Sunak said people's take home pay will not decrease because of the income tax threshold freeze, but said it does remove the incremental benefit created had thresholds continued to increase with inflation.

UK Budget 2021 - Here's what's happening to income tax thresholds:

  • The tax-free personal allowance will rise by £70 from £12,500 to £12,570 in April 2021, and it will then remain there until April 2026. This applies to everyone in England, Scotland, Wales and Northern Ireland.
  • The higher rate tax threshold, at which point the amount charged rises from 20% to 40%,will rise by £270 from £50,000 to £50,270 from April 2021, where it will remain until April 2026. This applies in England, Northern Ireland and Wales.

    In Scotland, above the tax-free personal allowance, which is the same as in the rest of the UK, there are different income tax thresholds for employees earning a salary, and so this change won't apply. (The exception is for earnings from other types of income such as savings or dividends income, for which the same higher rate threshold applies across the UK.)

  • The additional rate tax threshold, at which point the amount charged rises from 40% to 45%, is currently £150,000. This isn't changing and will remain the same until April 2026.

The fact that thresholds will remain static and won't be rising with inflation means as average incomes grow, many will be pulled into a higher tax category - a process known in Treasury jargon as 'fiscal drag'. The Office for Budget Responsibility today published figures that estimated freezes to the income tax personal allowance and higher rate threshold for four years "will bring 1.3 million people into the tax system and create one million higher rate taxpayers by 2025-26".

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UK Budget 2021 - The upper limit for National Insurance Contributions is also being frozen

The Government's also said it's freezing one threshold for class 1 National Insurance Contributions (NICs). NICs are effectively a separate tax on income, and class 1 NICs are those paid by employees. Here's what's happening:

  • The primary threshold or lower profits limit (below which you won't pay any NICs) will rise from £9,500 now to £9,568 in April 2021. We don't know what's happening to it after that - the Government says the threshold in future will be "considered and set at future fiscal events" - ie, in a major Government announcement like a Budget.
  • The upper earnings limit or upper profits limit (the point up to which you then pay 12% NICs and above which you pay 2%) will risefrom £50,000 now to £50,270 from April 2021, but will then be frozen until April 2026.

In theory, because you pay 12% below this upper threshold and only 2% above, this change could mean some whose salaries rise with inflation pay a lower rate of NICs than they would have done if the threshold had gone up - we're checking this analysis with the Treasury and will update this story when we hear back. However until we know how the primary threshold will change from 2022 onwards, and what else may change, it's impossible to say for sure what the overall impact will be.

The pensions lifetime allowance, inheritance tax and capital gains tax thresholds are being frozen too

Three more key thresholds will also be frozen until 2026 - all of which will result in some paying more tax than they would have done had the thresholds risen with inflation:

  • The pensions lifetime allowance will remain at £1,073,100 until 2026. The pensions lifetime allowance is the maximum amount you can pay into your pension over your lifetime before tax is due. With this allowance frozen, it means the amount you can save tax-free will be smaller in real terms. There is a separate annual tax-free pensions allowance of £40,000, although this isn't changing.
  • The inheritance tax allowance will remain at £325,000 (plus an additional £175,000 to pass on your home to children or grandchildren) until 2026. Inheritance tax is a tax on the estate - so the money, possessions and property - of someone who's died. Again, if the allowance doesn't rise but the value of someone's estate does, it means it's more likely to become taxable.
  • The capital gains tax allowance will remain at £12,300/yr for individuals until 2026. Capital gains tax is usually paid on any ‘gain’ or profit you make when you sell or dispose of assets, such as personal possessions, a second home or shares that aren’t within an ISA, but you won't pay tax on gains which are less than the allowance. With the allowance frozen instead of rising with inflation, it means gains are more likely to become taxable in future.

UK Budget 2021: Everything you need to know

1. Covid-19

  • An extra £1.65 billion cash injection to ensure the Covid-19 vaccination roll-out in England continues to be a success.
  • £28 million to increase the UK’s capacity for vaccine testing, support for clinical trials and improve the UK’s ability to rapidly acquire samples of new variants of COVID-19.
  • £22 million for a world-leading study to test the effectiveness of combinations of different Covid-19 vaccines. This will also fund the world’s first study assessing the effectiveness of a third dose of vaccine to improve the response against current and future variants of COVID-19.
  • A further £5 million on top of a previous £9 million investment in clinical-scale mRNA manufacturing, to create a ‘library’ of vaccines that will work against Covid-19 variants for possible rapid response deployment.
  • Extending £500 Test and Trace support payments in England until the summer.

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2. Protecting jobs and livelihoods

  • An extension of the Coronavirus Job Support Scheme to September 2021 across the UK.
  • An extension of the UK-wide Self Employment Income Support scheme to September 2021, with 600,000 more people who filed a tax return in 2019-20 now able to claim for the first time.
  • An extension to the temporary cut in Stamp Duty Land Tax in England and Northern Ireland until September will support the housing market and protect and create jobs.
  • A new mortgage guarantee scheme will enable all UK homebuyers secure a mortgage up to £600,000 with a 5% deposit.
  • £5 billion for new Restart Grants – a one off cash grant of up to £18,000 for hospitality, accommodation, leisure, personal care and gym businesses in England.
  • A new UK-wide Recovery Loan Scheme to make available loans between £25,001 and £10 million, and asset and invoice finance between £1,000 and £10 million, to help businesses of all sizes through the next stage of recovery.
  • Extension of the Film & TV Production Restart scheme in the UK, with an additional £300 million to support theatres, museums and other cultural organisations in England through the Culture Recovery Fund.
  • Six-month extension of the £20 per week Universal Credit uplift in Great Britain, with the Northern Ireland Executive receiving additional funding to match the increase. A one-off payment of £500 to eligible Working Tax Credit claimants across the UK.
  • Extension to the VAT cut to 5% for hospitality, accommodation and attractions across the UK until the end of September, followed by a 12.5% rate for a further six months until 31 March 2022.
  • 750,000 eligible businesses in the retail, hospitality and leisure sectors in England will benefit from business rates relief.
  • Extension of the apprenticeship hiring incentive in England to September 2021 and an increase of payment to £3,000.
  • £7 million for a new “flexi-job” apprenticeship programme in England, that will enable apprentices to work with a number of employers in one sector.
  • Additional £126 million for 40,000 more traineeships in England, funding high quality work placements and training for 16-24 year olds in 2021/22 academic year.
  • More than doubling the legal limit for single contactless payments, from £45 to £100

  • £10 million to support veterans with mental health needs across the UK.
  • £19 million to tackle domestic abuse in England and Wales, with funding for a network of ‘Respite Rooms’ to support homeless women and a programme to prevent reoffending.
  • £90 million funding to support our government-sponsored national museums in England due to the financial impact of Covid-19.
  • £300 million for major spectator sports, supporting clubs and governing bodies in England as fans begin to return to stadia.
  • Small and medium-sized employers in the UK will continue to be able to reclaim up to two weeks of eligible Statutory Sick Pay (SSP) costs per employee from the Government.
  • To further support the cashflow of businesses, the government is extending the loss carry back rules worth up to £760,000 per company.
  • £100 million for a new Taxpayer Protection Taskforce to crack-down on COVID fraudsters who have exploited UK Government support schemes.

3. Strengthening the public finances

  • Maintaining the income tax Personal Allowance and higher rate threshold from April 2022 until April 2026.
  • To balance the need to raise revenue with the objective of having an internationally competitive tax system, the rate of Corporation Tax will increase to 25%, which will remain the lowest rate in the G7. In order to support the recovery, the increase will not take effect until 2023. Businesses with profits of £50,000 or less, around 70% of actively trading companies, will continue to be taxed at 19% and a taper above £50,000 will be introduced so that only businesses with profits greater than £250,000 will be taxed at the full 25% rate.
  • Maintaining inheritance tax thresholds at their current levels until April 2026.
  • Fuel duty will be frozen for the 11thconsecutive year.
  • Alcohol duties will be frozen across the board for the second year running saving drinkers £1.7 billion.
  • Capping the amount of SME payable R&D tax credit that a business can receive in any one year at £20,000 (plus three times the company’s total PAYE and NICs liability).
  • Maintaining the Lifetime Allowance at its current level of £1,073,100 until April 2026.
  • The adult ISA annual subscription limit for 2021-22 will remain unchanged at £20,000.

4. An investment-led recovery

  • Beginning April 2021, the new super-deduction will cut companies’ tax bill by 25p for every pound they invest in new equipment. This is worth around £25 billion to UK companies over the two-year period the super-deduction will be in full effect.
  • Eight new English Freeports will be based in East Midlands Airport, Felixstowe & Harwich, Humber, Liverpool City Region, Plymouth, Solent, Thames and Teesside.
  • The £375 million UK-wide ‘Future Fund: Breakthrough’ will invest in highly innovative companies such as those working in life sciences, quantum computing, or clean tech, that are aiming to raise at least £20 million of funding.
  • Reforms to the immigration system will help ambitious UK businesses attract the brightest and best international talent.
  • A new Help to Grow scheme to offer up to 130,000 companies across the UK a digital and management boost.
  • £2.8 million to support a UK and Ireland bid to host the 2030 World Cup and £25 million investment in UK grassroots sports, enough for around 700 new pitches.
  • Launching a review of Research & Development tax reliefs to make sure the UK remains a competitive location for cutting-edge research.
  • £20 million to fund a UK-wide competition to develop floating offshore wind demonstrators and help support the government’s aim to generate enough electricity from offshore wind to power every home by 2030.
  • £68 million to fund a UK-wide competition to deliver first-of-a-kind long-duration energy storage prototypes that will reduce the cost of net zero by storing excess low carbon energy over longer periods.
  • £4 million for a biomass feedstocks programme in the UK to identify ways to increase the production of green energy crops and forest products that can be used for energy.
  • Publication of the the government’s ‘Build Back Better: our plan for growth’.
  • Over £1 billion funding for a further 45 towns in England through the Towns Fund, supporting their long-term economic and social regeneration as well as their immediate recovery from the impacts of COVID-19.
  • £135 million to progress A66 Trans-Pennine upgrade.
  • £28 million to fund the Queen’s Platinum Jubilee celebrations in 2022, delivering a major celebration for the UK.
  • Plans for at least £15 billion of green gilt issuance in the coming financial year, to help finance critical projects to tackle climate change and other environmental challenges, fund important infrastructure investment, and create green jobs across the UK.
  • £150 million Community Ownership Fund will allow communities across the UK to invest to protect the assets that matter most to them such as pubs, theatres, shops, or local sports clubs.
  • £18.8 million to transform local cultural projects in Hartlepool, Carlisle, Wakefield and Yeovil.
  • Publication of the prospectus for the £4.8 billion UK-wide Levelling Up Fund, providing guidance for local areas on how to submit bids for the first round of funding starting in 21-22.

5. Scotland, Wales and Northern Ireland

  • Individuals and businesses in Scotland, Wales and Northern Ireland continue to be supported by the UK Government through the Coronavirus Job Retention Scheme, self-employment grants, loan schemes and VAT cuts. Devolved administrations have received Barnett funding to provide support in areas of devolved responsibility.
  • The Budget confirms an additional £2.4 billion for the devolved administrations for 2021-22 through the Barnett formula. This is an additional £1.2 billion for the Scottish Government, £740 million for the Welsh Government, £410 million for the Northern Ireland Executive.
  • The devolved administrations will also receive £1.4 billion of funding in 2021-22 outside the Barnett formula.
  • £27 million in the Aberdeen Energy Transition Zone and £5 million in the Global Underwater Hub in Scotland, the first stage in delivering the North Sea Transition Deal.
  • Three Growth Deals in Scotland – Ayrshire, Argyll & Bute, and Falkirk – will receive funding more quickly.
  • £4.8 million to support the development of a demonstration hydrogen hub in Holyhead, Anglesey.
  • Up to £30 million for the Global Centre for Rail Excellence in Wales.
  • Three City and Growth Deals – in North-Wales, Mid-Wales and Swansea Bay – will receive funding more quickly.
  • Northern Ireland will benefit from the Corporation Tax exemption for the Northern Ireland Housing Executive, Northern Ireland’s biggest landlord.
  • Almost half of the £400 million New Deal for Northern Ireland funding has been allocated, subject to business cases, to: new systems for supermarkets and small traders to manage new trading arrangements; building greater resilience in medicine supply chains; promoting Northern Ireland’s goods and services overseas; and supporting skills development.
  • £5 million to extend the Tackling Paramilitary Programme in 2021-22.
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