The Employment Allowance is a National Insurance allowance that enables eligible employers to reduce their employers’ (secondary) Class 1 National Insurance bill by up to £4,000. However, not all employers can benefit – there are some important exclusions.
To qualify for the Employment Allowance, the employer’s Class 1 National Insurance liabilities for 2020/21 must be less than £100,000. Where the employer is part of a group, the £100,000 limit applies to the group as a whole, not the individual group companies.
The Employment Allowance is not available to companies where the sole employee is also a director. This rules out most personal companies. However, family companies with more than one employee are able to claim.
There are other exclusions too, for example, employers who employ someone for personal, household and domestic work unless the worker is a care or support worker.
Amount of the allowance
The Employment Allowance is set at the lower of £4,000 and the employer’s secondary Class 1 National Insurance liability for the year. Once claimed it is set against the employer’s Class 1 liability until it is used up.
A Ltd is eligible for the Employment Allowance. Its secondary Class 1 National Insurance liability is £1,500 a month. It claimed the Employment Allowance at the start of the 2021/22 tax year. The allowance is used as follows:
Month 1: £1,500 of the Employment Allowance is set against the liability for the month of £1,500, leaving nothing to pay. The remaining Employment Allowance of £2,500 (£4,000 – £1,500) is carried forward.
Month 2: £1,500 of the Employment Allowance is set against the liability for the month of £1,500, leaving nothing to pay. The remaining Employment Allowance of £500 (£2,500 – £1,500) is carried forward.
Month 3: The remaining £500 of the Employment Allowance is set against the liability for the month of £1,500, leaving £1,000 to pay. The Employment Allowance has now been used in full.
Months 4 to 12: The Employment Allowance has been used in full, so the employer’s Class 1 National Insurance liability for the month of £1,500 is payable in full.
Claiming the allowance
The Employment Allowance is not given automatically and must be claimed each year. This can be done through the payroll software, or via HMRC’s Basic PAYE Tools if the payroll software does not have an Employment Payment Summary (EPS) feature.
Although claims can be made at any time in the tax year, the earlier the claim is made, the earlier the employer will start benefiting from the Employment Allowance.
Claims can also be made retrospectively for the previous four tax years if the employer was eligible for the Employment Allowance, but did not claim it.
The financial impact of the Covid-19 pandemic is unprecedented and borrowing levels in 2020/21 of 16.9% of GDP represent the highest level of peacetime borrowing. To meet some of this cost, the Chancellor, Rishi Sunak, announced in the 2021 Budget that various thresholds and allowances would remain at their 2021/22 levels until April 2026.
The personal allowance is increased to £12,570 for 2021/22 – an inflationary increase of £70 over the 2020/21 level of £12,500. However, the allowance will remain at this level for 2022/23, 2023/24, 2024/25 and 2025/26. As incomes rise with inflation, people who currently do not pay tax may start to pay tax once their income rises above £12,570.
Income tax rates and bands
The basic rate band is increased to £37,700 for 2021/22. This means that where someone is in receipt of the personal allowance of £12,570, they will start paying higher rate tax once their income exceeds £50,270. This remains the case for tax years up to and including 2025/26.
The basic rate band and higher rate threshold will remain at these levels until April 2026. As incomes rise in line with inflation, more people will pay tax at the higher and the additional rates. Tax is payable at the additional rate of 45% on taxable income in excess of £150,000.
Capital gains tax annual exempt amount
The capital gains tax annual exempt amount remains at £12,300 for 2021/22 and is frozen at this level until April 2026.
However, there may be changes to capital gains tax on the horizon as this is something that the Government are looking at.
The upper earnings limit for Class 1 National Insurance contributions and the upper profits limit for Class 4 contributions are aligned with the rate at which higher rate tax becomes payable. Both are set at £50,270 for 2021/22. For Class 1 purposes, this is equivalent to £967 per week and £4,189 per month. These too will remain unchanged until April 2026.
All other National Insurance thresholds will be reviewed at the appropriate time.
The nil rate band has been frozen at its current level of £325,000 since 2008/09. It will remain at this level up to and including 2025/26. The freezing of the threshold brings more estates within the ambit of inheritance tax.
The residence nil rate band (RNRB) remains at its 2020/21 level of £175,000 for 2021/22. It too will remain at this level for the 2023/24 to 2025/26 years inclusive. The RNRB is reduced where the value of the estate is £2 million or above by £1 for every £2 by which the value of the estate exceeds £2 million.
Pension lifetime allowance
The pension lifetime allowance places a cap on the value of tax relieved pension savings. The tax relief on pension savings in excess of the lifetime allowance is recovered in the form of a 25% tax charge where the excess is taken as a pension and a 55% tax charge where the excess is taken as a lump sum. The lifetime allowance remains at £1,073,100 for 2021/22 and will stay at this level until April 2026. This will limit the ability of anyone with pension savings at or near this level to make further tax-relieved pension contributions during 2021/22 and the following four tax years.
The Self-Employment Income Support Scheme (SEISS) has provided grant support for self-employed individuals whose business has been adversely affected by the Covid-19 pandemic. An extension to the scheme was announced at the time of the 2021 Budget. As a result, it will continue to provide support until September 2021.
Three grants have already been made under the scheme. As a result of the extension, a further two grants will be available. In addition, individuals who started trading in 2019/20 may now be eligible to claim.
The fourth grant covers the period from February to April 2021 and is based on 80% of three months’ average trading profits. The amount of the grant is capped at £7,500. It is paid out in a single instalment.
To be eligible, the trader must have filed his or her 2019/20 self-assessment tax return and traded in 2020/21. Only traders whose trading profit is not more than £50,000 in 2019/20 or, where trading profit exceeds this level in 2019/20, not more than £50,000 on average over the period from 2016/17 to 2019/20 can benefit from the grant. In addition, income from self-employment must account for at least 50% of the individual’s total income.
To qualify for the grant, the trader must either:
- be trading currently but demand has fallen as a result of the impact of the Covid-19 pandemic; or
- have been trading but is unable to do so temporarily as a result of the Covid-19 pandemic.
The trader must also declare that:
- they intend to continue trading; and
- they reasonably believe that there will be a significant reduction in their trading profits due to reduced business activity, capacity, demand or inability to trade due to Coronavirus.
Claims for the fourth grant can be made online from late April 2021 until 31 May 2021.
The fifth and final grant will cover the period from May to September 2021. The amount of this grant depends on the extent by turnover has fallen as a result of the Covid-19 pandemic.
Traders who have suffered a reduction in turnover of at least 30% will be eligible for a grant worth 80% of three months’ average trading profits capped at £7,500. A smaller grant worth 30% of three months’ average trading profits capped at £2,850 will be available to traders who turnover has fallen as a result of coronavirus but where the reduction in turnover is less than 30%.
When the SEISS was originally launched, only those traders who had filed their 2018/19 tax return by 23 April 2020 could claim. As the filing date for the 2019/20 tax return of 31 January 2021 has now passed, individuals who commenced trading in 2019/20 and who have been adversely affected by the Covid-19 pandemic can claim the fourth and fifth grants under the scheme provided that they had filed their 2019/20 self-assessment return by midnight on 2 March 2021. They will also need to meet the other eligibility conditions.
Grants are taxable
Grants received under the SEIS are taxable and must be taken into account in working out the taxable profits for the year in which the grant is received.
On 3 March 2021, the Chancellor, Rishi Sunak, submitted his budget for 2021 with the following highlights:
Extension of the Coronavirus Job Retention Scheme till September
Until the ninth month of the year 2021, the Coronavirus Job Retention Scheme will remain operational as employees continue to receive 80% of their salary for the period of their absence from work. However, every concerned staff needs to meet certain costs starting from July. The set employer contribution is 10% of the normal pay for furloughed hours for July, while the percentage will rise to 20% for August and September.
Self-Employment Income Support Scheme to Include Further Grants
With the Self-Employment Income Support Scheme, self-employed individuals can apply for additional two grants. Starting from February to April 2021, the fourth grant is expected to cover three months and worth 80% of the average profits made in three months, albeit capped at £7,500. Although the final grant depends on the pandemic’s impact on turnover, it is expected to cover May to September. Those who commenced their first self-employment in 19/20 can access the final two grants, provided they covered their 2019/20 tax return latest by 2 March 2021 midnight.
Continuation of the SSP Rebate Scheme
By utilizing the SSP rebate scheme, smaller employees can reclaim SSP per employee for up to two weeks from the Government, provided the coronavirus-related condition causes the absence. The same scheme is set to continue for now.
Income Tax Thresholds on Hold
While the basic rate stands at £37,700, personal allowance is set to rise to £12,570 for the 2021/22 period. This implies that higher rate tax is payable for any individual receiving the standard personal allowance immediately after the income surpasses £50,270. For 2021/22, the income tax rate remains the same at 20%, 40%, and 45%; the same applies to the 7.5%, 32.5%, and 38.1% dividend tax rates. Until 2026, it is expected to see personal allowance and high rate threshold frozen at their 2021/22 level.
IHT Nil-rate Band to Remain the Same
Currently, the inheritance tax nil-rate band stands at £325,000 – it is set to remain stagnant. Wherever the main residence belongs to a direct descendant, the resident nil rate band takes effect. In such an area, the current level of $175,000 is expected to continue till April 2026.
Capital Gains Tax Annual Exempt Amount stands still.
For the 2021/22 period, the capital gains tax annual exempt amount experiences no change and will remain so for the next half-a-decade (2025/26).
Zero change to Pension Lifetime Allowance
Currently, the pension lifetime allowance stands at £1,073,100. The allowance that places a cap on tax-relieved pension savings is expected to remain the same until 2021. Expectedly, the situation will affect people having pension savings close to or at the level by limiting future tax-relieved pension savings.
Huge deduction for Capital Expenditure
Companies having investment in plant and machinery with incurred expenditure between 1 April 2021 and 31 March 2023 will benefit from enhanced capital allowances for the investment in question. For expenditure on plant and machinery that qualifies for main rate capital allowances of 18%, there will be a first-year allowance of 130%. At the same time, expenditure on plant and machinery qualifying for special rate capital allowances of 6% can utilize the 50% first-year allowance. This doesn’t influence the Annual Investment Allowance, which is claimable when more rewarding.
A temporary increment of the carry-back period for losses
Companies and businesses that are unincorporated stand a chance to benefit from a momentary extension concerning the carry-back period for losses. The period has been increased by three years for a limited period. The unincorporated businesses can utilize the prolonged carry-back for losses suffered between 2020 and 2022. As for company groups, the offer is applicable to losses incurred between 1 April 2020 and 31 March 2021, as well as 1 April 2021 and 31 March 2022 – however, the offer is capped at £2 million for both accounting periods.
There will be a relief for the profits secured in the latter year before those meant for the earlier year.
There might be a need for tax repayment to benefit from the offer concerning the carry-back losses incurred due to the pandemic.
Corporation Tax to rise in the future
An increase of 6% has been added to the current rate of 19% for corporation tax that organizations having taxable profits of £250,000 or more need to pay. This new development will commence by 1 April 2023. For small companies with £50,000 profits or less, they have to pay 19% corporation tax while a 25% rate applies to companies making between £50,000 and £250,000. However, the latter can take advantage of the marginal relief. Taking into account the number of relevant companies and accounting periods below twelve months, the limits may reduce.
Covid-19 Antigen tests to come with tax exemption
If an employer chooses to refund a staff for the coronavirus antigen test cost, an income tax exemption will apply retrospectively for 2020/2021 and 2021/2022. The same exemption will cover National Insurance purposes.
Prolonged Temporary SDLT threshold
Before now, the Stamp Duty Land Tax (SDLT) residential threshold, which was increased to £500,000, is expected to close by 31st of March 2021. However, it has been prolonged until 30 June 2021. Starting from 1 July 2021, the threshold will come down to £250,000 and get back to the normal level of £125,000 by 1 October 2021. While SDLT is applicable to the property purchased in Northern Ireland and England only, Land Transaction Tax (LTT) applies in Wales as Land and Buildings Transaction Tax (LBTT) is applicable in Scotland.
VAT Registration Thresholds Stands Still at £85,000
The current £85,000 cap for VAT registration threshold will remain the same for 2021/22 and the subsequent two years.
Extended Temporary 5% VAT rate for Leisure and Hospitality
Until 30 September 2021, the current 5% VAT rate for holiday accommodation, leisure attractions, and hospitality will be the same. However, starting from 1 October 2021 till 31 March 2022, a new 12.5% rate applies. From there, it will revert to the normal rate of 20% by 1 October 2022.
Private residence relief removes the charge to capital gains tax on the taxpayer’s only or main residence.
For the purposes of the relief, a taxpayer can generally only have one residence qualifying for the relief at any one time, subject to the final period exemption for properties which have been the only or main residence at some time, set at nine months from 6 April 2020 (unless the taxpayer goes into care, in which case the final 36 months count).
Married couples and civil partners can only have one main residence between them.
More than one residence
Where a taxpayer has more than one residence, they can nominate which of them counts as the main residence for the capital gains tax purposes. However, to be nominated, the property must be lived in as a ‘residence’ – a property which is let out cannot be nominated.
The nomination must be made within two years of the date on which the particular combination of residences changes. If a nomination is not made, which property qualifies as the main residence for capital gains tax purposes will be determined in accordance with the facts.
Bertie has lived in a cottage in Shropshire since December 2012. In October 2019 he starts a new job in London, buying a flat in January 2020 to live in during the week. He has until January 2022 to nominate which of his residences is his main residence for capital gains tax purposes.
Where a couple marry or enter into a civil partnership and each partner owned a residence which the couple continue to use after the date of their marriage of civil partnership, they must nominate which residence is their joint main residence as married couples and civil partners can only have one main residence between them. The nomination must be made within two years of the date of their marriage or civil partnership.
However, unmarried couples can each have their own main residence.
Those looking to buy an investment property may wish to consider a holiday let. Not only do the second and subsequent homes benefit from SDLT savings as a result of the temporary increase in the SDLT threshold, they can also benefit from the favourable tax regime for furnished holiday lettings.
There are special tax rules for properties that qualify as furnished holiday lettings:
- plant and machinery capital allowances can be claimed for furniture, equipment and fixtures;
- capital gains tax reliefs for traders – business asset disposal relief, business asset rollover relief, relief for gifts of business assets — are available;
- profits count as earnings for pension purposes.
However, to qualify, the let must meet the conditions to qualify as an FHL.
The property must be in the UK or in the EEA, it must be let commercially and it must be let furnished. In addition, it must meet three occupancy conditions:
- pattern of occupancy condition — the total of all lettings that exceed 31 days is not more than 155 days in the year;
- the availability condition — the property must be available for letting as furnished holiday accommodation for at least 210 days in the tax year (excluding any days in which the landlord stays in the property); and
- the letting condition –the property must be let commercially as furnished holiday accommodation to the public for at least 105 days in the year (ignoring lets of more than 31 days unless the let exceeds 31 days as a result of unforeseen circumstances and lets to family or friends).
If the let does not meet the letting condition (which may be the case, for example, if there are further lockdowns) all is not lost. Where the landlord has more than one property let as a FHL, the letting condition is treated as met if the average rate of occupancy for all properties is at least 105 days in the year. To take advantage of this, the landlord must make an averaging election no later than one year from 31 January following the end of the tax year (i.e. by 31 January 2023 in respect of an election for 2020/21).
The second way of qualifying as a FHL in a year where the letting condition has not been met is to make a period of grace election. This route can be taken where there was a genuine intention to meet the condition but this did not happen due to unforeseen circumstances (such as letting cancelled due to lockdowns). To be eligible to make an election, the pattern of occupation and the availability conditions must have been met and, for the first year for which a period of grace election is made, the lettings condition was met in the previous tax year. Where a period of grace election is made, the lettings condition is treated as met. A further period of grace election can be made for the following year if the lettings condition is not met that year. However, if after two successive period of grace elections the letting condition is not met, the property will cease to qualify as a FHL.
Separate FHL business
Lettings that are FHLs are taxed as a separate FHL property business.
The residential SDLT threshold is increased to £500,000 where completion takes place between 8 July 2020 and 31 March 2020. This also benefits those purchasing second and subsequent residential properties as the 3% supplement is added to the residential rates, as reduced. However, the clock is running and completion must take place by 31 March 2021 to benefit from the savings.