The Pandemic’s Impact on Taxation 2021

Posted on 1st January 2021 by David Rudd

The increase in government spending last year has called for most of us to wonder if there will be tax changes this year and if so, in what areas.

In the spending review issued towards the end of last year, Chancellor Rishi Sunak detailed government spending for 2021. With government borrowing expected to be at a high, an increase in budget cuts/freezes and higher unemployment rates, the Chancellor warned of an economic emergency. It has been reported the UK will suffer the worst economic decline in 300 years. 

The state of the economy is therefore causing a lot of uncertainty around future tax rises, however, we speculate there will be both personal and business tax rises in order to put money back into the government and economy. 

In this article, we will be discussing the tax areas we suspect the government will be reshaping in 2021, our predicted changes and how you can prepare your accounts accordingly. 

Were tax rises discussed in the Autumn Budget?

Each year the Treasury’s annual UK Budget is released in Autumn and provides an update on the government’s economic and spending plans, including tax changes. 

Tax rises were expected to be part of the Autumn Budget; however, due Covid-19 causing extra government spending the Autumn Budget was scrapped. Speaking on the cancelled Budget, the Treasury said: “now is not the right time to outline long-term plans – people want to see us focused on the here and now.” 

Has anything replaced the Autumn Budget?

There was a Summer Economic Update delivered in July last year by the chancellor to protect the UK economy during the pandemic. The plan for jobs supported jobs and businesses by introducing the following:

• Eat out to help out scheme
• Stamp duty holiday
• VAT cuts for hospitality and tourism sectors
• Kickstart employment scheme
• Job retention bonus
• Worksearch, skills and apprenticeships boost
• Green homes grant
• Public sector and social housing decarbonisation
• Infrastructure package

Since then, Rishi Sunak has introduced the Winter Economy Plan which includes a new job support scheme, an extension of the self-employment income support scheme and government loan support for businesses.  

However, the Autumn Budget has not been replaced and we are still expecting a new Budget this year. We are hoping for a Budget announcement in the Spring and in the meantime, we are expecting ad hoc announcements from the government. 

What will the next Budget include?

Due to the increased spending last year and the increased spending detailed for this year, there will have to be an examination of the tax system for the economy to recover. We are therefore expecting a rise in taxes which we predict will happen in various areas such as corporation tax, capital gains tax, insurance premium tax, class 4 national insurance and pension tax relief. 

Corporation Tax

It has been reported that the chancellor is considering a 5% increase in corporation tax taking it from 19% to 24% – which is in line with the global average. This is expected to have a significant impact on smaller companies if introduced. We predict this rise will come into effect. 

Capital Gains Tax

The Office of Tax Simplification published a report, towards the end of last year, for an overhaul of capital gains tax including raising capital gains tax rates closer to income tax rates. It is likely capital gains tax rates will therefore increase. In particular further increases to Capital Gains Tax on residential property are expected.

Insurance Premium Tax

We predict there will be an increase in Insurance Premium Tax from the current 12%. In November, HM Revenue and Customs called for a consultation on proposals to improve the operations of Insurance Premium Tax.

Class 4 National Insurance

We predict in Class 4 National Insurance, which is set at 9% for most people, to 12%. It is likely this move will be made to bring it in line with Class 1 National Insurance. The chancellor may justify this move as a response to the support self-employed people received from the government during Covid. 

Pension Tax Relief

The government has decided not to review the impact of pension tax relief as it has carried out a number of consultations in this area. However, we think it is possible the government may restrict tax relief for higher and additional rate taxpayers. 

In addition to the above, there have been calls for the chancellor to introduce new taxes too. Last year, Deutsche Bank proposed making employees pay a 5% tax for each day they work remotely which could raise £7bn. 

What does this mean for Steven Burton & Co clients? 

Although these are only predictions, our clients should expect an increase in one or more tax areas. We expect the discussions around tax will start early this year in order to assist in the recovery of the economy. As nothing is set it stone yet, we want to warn our clients about future tax rises and will continue to share updates when they happen.

Many accountants offer little tax saving advice, and many of those that do only offer basic and last minute tax planning. Steven Burton & Co offer a Pre-Year End Review, taking place 3 months before your year end, giving you a more realistic and measured timeframe to implement our advice. If you’d like more information on how your personal and business accounts could be affected, get in touch with us.