5 min read 12 Mar 21
The first Budget from the UK’s Chancellor of the Exchequer, Rishi Sunak, was delivered on the same day in March 2020 that the global COVID-19 pandemic was officially declared.
While it was clear then that its effects would be profound, few predicted that the virus would wreak so much damage on public health and public finances.
The UK economy shrank by a remarkable 9.9% in 2020 – its largest annual contraction in three centuries, according to the Treasury. In response, the UK government has borrowed the most it ever has in peacetime to support businesses and households, and to help stimulate economic activity.
This was the context for the 2021 Budget, announced on 3 March 2021.
Again, Sunak promised continued financial support for furloughed workers, the self-employed and businesses, among other groups hit hard by the pandemic. Additional fiscal support, in the form of tax and spending decisions, will total almost £65 billion overall for the current and upcoming tax year.
Alongside a package of measures to get the UK economy growing again, as it emerges from the worst of the pandemic, the Chancellor made clear that the bill for today’s support will have to start being paid over the coming years.
The 2021 Budget included a number of measures favourable to businesses, in the short term at least.
In addition to grants worth £5 billion intended to get companies back on their feet after forced closures, the Chancellor extended over £6.5 billion in relief on business rates, which companies pay on their shops and offices. The hospitality sector will also pay reduced rates of VAT until April 2022, cutting their tax bills by an estimated £4.7 billion.
To encourage investment in the economy, companies that invest domestically will be able to cut their tax bills by more than what they spend on qualifying new plant and machinery assets. This new so-called “super-deduction”, which runs over the next two years to April 2023, is forecast to be worth roughly £25 billion to companies that invest. This might be expected to boost capital-intensive sectors of the economy, like manufacturing.
But there is a sting in the tail for UK business. The Chancellor announced that, as part of “a fair way to deliver more sustainable public finances”, the rate of corporation tax (which companies pay on their profits) would rise from 19% to 25% in April 2023. This measure is expected to raise almost £12 billion for the Exchequer in the 2023-24 tax year, then £16 billion in the following year.
For all but the smallest companies, which will be exempted from the 25% rate, higher corporate tax will ultimately be expected to translate into lower after-tax profits to distribute to their shareholders.
It is a similar story of short-term tax relief, but longer-term tax increases, for individuals too.
Among the most significant announcements for people buying or selling a home will be the extended temporary reduction in stamp duty. Stamp duty depends on the value of the purchase, but up to £500,000 of property prices will continue to be exempt until the end of June, and then up to £250,000 exempt until the end of September 2021.
The cancellation of increases to duties on alcohol and fuel will meanwhile save households just over £1 billion a year in extra tax combined that had been pencilled in.
Thresholds relating to inheritance tax, capital gains tax, and pension savings are also remaining unchanged, contrary to some speculation before the Budget. The annual allowance for squirreling money away into individual savings accounts (ISAs) is staying put too, at £20,000.
Looking ahead to future years, though, it looks like more workers will end up paying more income tax.
Although the personal (income tax-free) allowance and higher rate threshold (at which a 40% rate becomes payable) are rising slightly this April, to £12,570 and £50,270 respectively, they will remain frozen at these points for five years. This means that as wages rise, even in line with inflation, they will get pulled into higher rates of marginal income tax. This effect, known as ‘fiscal drag’, is expected to net the Exchequer over £5 billion a year in extra tax by 2025.
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