The 2021 budget announced limited support for self-employed workers and contractors. Chancellor Rishi Sunak told the British workers on Wednesday that his 2021 budget ‘meets the moment with a three-part plan to protect the jobs and livelihoods of the British people’. Mr Sunak outlined that his ‘three part plan’ consists of business support for workers still being affected by coronavirus, paying for the response and investment in economic growth, in his second budget speech given on 3 March 2021.
Budget News for Self-Employment
Self-Employment Income Support Scheme
The 2021 budget announcement confirmed details of a fourth SEISS grant based on 80% of three months’ average trading profits in the tax year 2019-20, which aims to support self-employed workers for the period February- April, which can be claimed from late April 2021. Payment will be in a single instalment capped at £7,500. This late opening of the Grant portal leaves many self-employed workers without essential income throughout the period February – April, just after they have paid a potentially large income tax bill. Self-employed workers affected by the the fourth SEISS grant delay may need to take into consideration, applying for HMRC’s Enhanced Self-Employed Payment Plan also known as Time to Pay, to make income tax payments for profits made in 2019-20, which was partially deferred from July 2020, and possibly the first payment on account for 2020-21. A Time to Pay Arrangement with HMRC is a debt repayment plan for self employed workers with outstanding taxes. HMRC increased the threshold for paying tax liabilities from £10,000 to £30,000 for self assessment customers last Autumn, with the aim of easing financial burdens caused the pandemic. Those experiencing difficulty paying tax originally due by 31 Jan, have 60 days after the elapsed payment date to apply for a Time to Pay plan.This fourth SEISS grant delay is also a blow to annual fiscal planning for the self-employed. This latest update to SEISS still does not take into account parents who declared lower earnings in the eligibility period due to maternity leave. However workers who were newly self-employed from April 2019 will now qualify for SEISS. While eligibility for SEISS has been widened, there’s still no support for the estimated three million self-employed people including freelancers, limited company directors, and the self-employed with more than £50,000 in trading profits. A fifth and final grant was newly announced in then2021 budget which can be claimed from late July 2021 to cover the period May to September 2021. This grant will be determined by a turnover test. Where the self-employed business turnover has fallen by 30% the grant will be worth 80% of three months’ average trading profits capped at £7,500. Workers whose turnover has fallen by less than 30% will receive a 30% grant, capped at £2,850.
Furlough Scheme Extension
The 2021 budget confirmed that the The Coronavirus Job Retention Scheme (CJRS)
otherwise known as the Furlough Scheme, has been extended until the end of September 2021. The current CJRS allows an employer to place an employee on furlough and apply for a grant to cover wage costs for the time an employee is on furlough. The level of grant available to employers under the scheme will stay the same until 30 June 2021. From 1 July 2021, the level of grant will be reduced and employers will be asked to contribute towards the cost of furloughed employees’ wages. To be eligible for the grant an employer must continue to pay furloughed employees 80% of their wages, up to a cap of £2,500 per month for the time they spend on furlough. The tapering effect means that the percentage recovery of furloughed wages will be 70% in July, up to a maximum of £2187.50 and
60% for August and September 2021up to a maximum of £1,875.00. Employers will need to continue to fund employer NICs and mandatory minimum automatic enrolment pension contributions. For periods starting on or after 1 May 2021, employers can claim for employees who were employed on 2 March 2021, as long as a PAYE Real Time Information (RTI) submission was made between 20 March 2020 and 2 March 2021, notifying a payment of earnings for that employee.
Recovery Loan Scheme
The government’s Plan for Jobs, which was announced in place of the cancelled autumn budget, included extensions to the Self-Employment Income Support Scheme (SEISS), Coronavirus Job Retention Scheme (CJRS) also known as the Furlough Scheme, and the Coronavirus Business Interruption Loan Scheme (CBILS) also known as the Bounce Back Loan. In this 2021 budget the chancellor has announced the Recovery Loan Scheme which will come in to replace these Coronavirus Loan Schemes from 6 April 2021. The Recovery Loan Scheme will provide lenders with a guaranteed 80% on eligible loans between £25,000 and £10 million, to give continued support and confidence to businesses in the UK. The scheme will be open to all businesses, including those who have already received support under the existing COVID-19 guaranteed loan schemes as mentioned above and those who haven’t.
Businesses in England will be eligible to apply for the new Restart Grant of up to £6,000 per premises for non-essential retail businesses and up to £18,000 per premises for hospitality, accommodation, leisure, personal care and gym businesses. This aims to provide cash stability so desperately needed for businesses to plan their fiscal activities, in order to safely relaunch trading over the coming months.
The 2021 budget confirmed an extension of business rates relief at 100% for eligible retail, hospitality and leisure properties in England, until 30 June 2021. Following from 1 July that will fall to 66% until 31 March 2022, capped at £2 million per business for properties that were required to be closed on 5 January 2021, or £105,000 per business for other eligible properties. Nurseries will also qualify for relief in the same way as other eligible properties. Each England, Scotland, Northern Ireland and Wales introduced 100% business rates relief mainly aimed at retail, leisure and hospitality businesses, who have not had to pay business rates from 1 April 2020 to 31 March 2021. Business rates were devolved to Scotland, Northern Ireland and Wales.In a Scottish Budget update statement on 16 February, the Scottish Government proposed an extension to the relief for the retail, hospitality, leisure and aviation sectors until 31 March 2022. Following the Chancellor’s announcement, the Welsh Finance Minister has extended the rates holiday for the retail, leisure and hospitality sectors in Wales for a further 12 months. The government announced in the 2020 budget that it would review the business rates system in England. It was announced recently that the final report will be published in Autumn 2021, with an interim report due on 23 March.
Tax and Support for Self-Employed Workers
Reduced VAT Rate for Hospitality Sector
The government introduced a temporary 5% reduced rate of VAT for certain supplies of hospitality, hotel and holiday accommodation and admissions to certain attractions, in July 2020. This was extended from September until 31 March 2021 and now until 30 September 2021. There will be a transitional rate of 12.5% which will apply for six months until 31 March 2022.
Corporation Tax Rise in 2023
The chancellor confirmed in his 2021 budget the suspected increase in Corporation Tax in an effort to start paying for the government’s response to coronavirus. This could affect support for self-employed workers who work through their limited company. Corporation tax will remain at 19% until 1 April 2023 it was revealed in the 2021 budget. Following this the corporation tax rate will increase to 25% for companies with profits over £250,000. The 19% rate will become a small profits rate payable by companies with profits of £50,000 or less. Companies with profits between £50,000 and £250,000 will pay tax at the main rate reduced by a marginal relief, providing a gradual increase in the effective corporation tax rate. Corporation tax had been due to fall to 17%, but Mr Sunak reversed this decision in his first budget in 2020. The chancellor has outlined in his 2021 budget, that this means only 10% of all companies will pay the highest 25 per cent rate.
Stealth Tax Rise
The personal allowance is to be frozen, it was announced in Mr Sunak’s 2021 budget. ‘Stealth taxes rises’ were rumoured before the 2021 budget announcement, by freezing current thresholds, as opposed to raising them in line with inflation. The chancellor announced that the personal allowance will be frozen at £12,570 for the tax years 2022-23 to 2025-26. The personal allowance is currently £12,500. In the 2018 budget it was stated that the allowance would remain at the same level until 2020/21 and the statutory provision to increase the allowance annually by CPI was to be overridden. The chancellor has confirmed in the 2021 budget that the personal allowance will increase by CPI (0.5%) for 2021-22 to £12,570. The personal allowance is reduced for those with ‘adjusted net income’ over £100,000. The reduction is £1 for every £2 of income above £100,000. So for the current tax year there is no personal allowance where adjusted net income exceeds £125,000. For 2021-22 there will be no personal allowance where adjusted net income exceeds £125,140.
The Marriage Allowance Backdated
The marriage allowance permits certain couples, where neither pays tax at more than the basic rate, to transfer 10% of their personal allowance to their spouse or civil partner. This reduces the recipient’s tax bill by up to approximately £250 a year. The marriage allowance was first introduced in 2015 and there are couples who are entitled to claim but have not yet done so. It is possible for those eligible to claim for all years backdated to 2016-17. It is possible for the total tax saving for all years up until 2020-21 could be over £1,000. To claim as far back as 2016-17, an application will need to be made by 5 April 2021.
The chancellor announced in his 2021 budget that the basic rate band will be £37,700 for 2021-22. This means that the threshold at which the 40% band applies, will be £50,270 for those who are entitled to the full personal allowance. The current basic rate of tax is 20%. In 2020-21 the band of income taxable at this rate is £37,500 so that the threshold at which the 40% band applies is £50,000 for those who are entitled to the full personal allowance. It was announced in the 2021 budget that the basic rate band will be frozen at £37,700 for the tax years 2022-23 to 2025-26. The National Insurance contributions Upper Earnings Limit and Upper Profits Limit will remain aligned to the higher rate threshold at £50,270 during these years. Those who earn over £150,000 will pay tax at 45% on their income.
In the Scottish budget on 28 January 2021, the Scottish Government proposed that the Scottish income tax rates will be frozen for 2021-22. The thresholds for the tax bands will be increased by 0.5% except for the 46% rate threshold which remains at £150,000. So the 41% band will apply to income over £43,662 for those who are entitled to the full personal allowance. The Scottish income tax rates and bands apply to income (other than savings and dividend income), such as employment income, self-employed trade profits and property income. In 2020-21 the tax rate ranges between 19% and 46%. Scottish taxpayers are entitled to the same personal allowance as individuals in the rest of the UK. The two higher rates are 41% and 46% rather than the 40% and 45% rates that apply to such income for other UK residents. For 2020-21, the 41% band applies to income over £43,430 for those who are entitled to the full personal allowance. The 46% rate applies to income over £150,000.
The Welsh Government has had the right to vary the rates of income tax payable by Welsh taxpayers in 2021-22. The UK government has reduced each of the three rates of income tax paid by Welsh taxpayers by 10 pence. The Welsh Government has set the Welsh rate of income tax at 10 pence for 2020-21, which has been added to the reduced rates. This means the tax payable by Welsh taxpayers is the same as that payable by English and Northern Irish taxpayers. The Welsh Government has announced that the income tax rate will remain at 10 pence for 2021-22.
The Savings Allowance
Savings income is income such as bank and building society interest. The Savings Allowance applies to savings income and the available allowance in a tax year depends on the individual’s marginal rate of income tax. Broadly, individuals taxed at up to the basic rate of tax have an allowance of £1,000. The allowance is £500 for higher rate taxpayers. There is no allowance due for additional rate taxpayers. Some taxpayers qualify for a 0% starting rate of tax on savings income up to £5,000. However, the rate is not available if taxable non-savings income exceeds £5,000.
This mainly applies to earnings, pensions, trading profits and property income, less allocated allowances and reliefs.
Tax on Dividends
The Dividend Allowance applies to the first £2,000 of dividends, which is chargeable to tax at 0%. Dividends within the allowance still count towards an individual’s basic or higher rate band and so may affect the rate of tax paid on dividends above the Dividend Allowance.To determine which tax band dividends fall into, dividends are treated as the last type of income to be taxed. Tax rates over the £2000 threshold are charged on dividends as follows:
- 7.5% for basic rate taxpayers
- 32.5% for higher rate taxpayers
- 38.1% for additional rate taxpayers
Benefit Support for Self-Employed Workers
Universal Credit Top-up Extended
Universal Credit is a single payment for people out of work. It unifies the previously separate benefits: housing, child tax credit, working tax credit, jobseeker’s allowance. Those who are eligible must not have capital worth over £16,000. Shortly after the 2020 Budget the Chancellor announced an increase in the Universal Credit standard allowance by £20 per week for one year. The 2021 budget sees the government extend the temporary £20 per week increase, for a further six months.
Working Tax Credit
The government is making a one-off payment of £500 to eligible Working Tax Credit claimants to provide extra support over the next six months. Workers who are part of a household that receives tax credits, may be eligible for a new one-off payment of £500. The new payment is being introduced to provide extra support when the temporary increase in Working Tax Credit ends as planned on 5 April 2021. Workers do not need to apply for the new payment. HMRC will contact eligible households by text message or letter in April to confirm your eligibility. You do not need to contact HMRC. If you are eligible, you should receive your payment by 23 April 2021. Eligibility includes those who, on 2 March 2021, were receiving:
- Working Tax Credit payments
- both Working Tax Credit and Child Tax Credit payments
- Child Tax Credit payments and are eligible for Working Tax Credit but do not get a payment because their income is too high
IR35 and Support for Self-Employed Workers
IR35 comes into force in April, which was postponed for a year as part of the Government’s Coronavirus business support package, will now take effect from April 2021. IR35 is designed to assess whether a contractor is a genuine contractor rather than a ‘disguised’ employee, for the purposes of paying tax. Contractors who work through their limited company enjoy a level of tax efficiency. While they don’t usually get employee benefits (like holiday and sick pay), they have flexibility and control over their work. Some contractors and their clients try to take advantage of this tax efficiency by working as if they’re self-employed, when in practical terms they function more like an employee. for all intents and purposes they are employees.
IR35 Compliance Checklist
- Usually IR35 won’t apply to a contract for services rather than employment.
- Supervision, direction, control. Contractors that fall outside of IR35 have freedom over how they complete their work, including what hows they work and they could engage a substitute to complete the work.
- Mutuality of obligation (MOO) is a key test in working out self-employed status. If the client is obliged to offer work (and pay you) and you’re obliged to take it, this counts as employment.
- Self-employed contractors work on a project-by-project basis, once they complete a project, there is no obligation to work on further tasks.
- Self-employed contractors are expected to provide their own equipment.
- Self-employed contractors take on financial risk for the project, like any other business, they take responsibility for any errors made and rectify those.
- Typically the self-employed can work for multiple clients at once.
- The relationship between contractor and client is of supplier and customer by contract, this needs to be genuine.
- Clarify the relationship with the hirer before you start the contract by considering all of these principles.
- Seek expert IR35 advice from your trusted professional accounting service.
At Prestige Business Management we can help you and your Business
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