Budget 2021 and the tax implications

The most important change to personal taxes was freezing of personal and other allowances for five years from 2022.

This means that for tax years ended 5 April 2022 until 5 April 2026, an individual will be able to have an annual income of £12,570 before paying tax and will be taxed at the higher 40 per cent rate once income exceeds £50,270, Dividends will be taxed at the various rates of 7.5 per cent, 32.5 per cent and 38.1 per cent, dependent on total income. The personal allowance will continue to be reduced for those with income in excess of £100,000.

The main rate of corporation tax payable by companies currently 19 per cent, is to increase to 25 per cent from 1 April 2023 on profits over £250,000. The rate for small profits under £50,000 will remain at 19 per cent. Where a company’s profits fall between £50,000 and £250,000, the lower and upper limits, it will be able to claim an amount of marginal relief, providing a gradual increase in the corporation tax rate.

The return to lower and upper rates and a high marginal rate in between will add another layer of complexity to the process of forecasting tax payments. Farm businesses trading as companies will need to consider how the increase in the main rate of corporation tax will impact on the company’s projected cash flows.

A “super-deduction” will be introduced from 1 April 2021, until 31 March 2023 allowing companies to benefit from a 130 per cent first year allowance for capital expenditure on qualifying new plant and machinery assets. This deduction, applicable to companies only, will allow companies to potentially reduce tax payable by 25p for every £1 invested in eligible plant and machinery.

Any companies that have already contracted to purchase plant and machinery will only be able to claim capital allowances at the normal standard rates: 100 per cent up to 1 million eligible spend to 31 December 2021.

All businesses, whether trading as a company, sole trader or partnership, will enjoy increased flexibility to carry back losses in the current trading year for an additional two years; currently losses can only be carried back twelve months.

Some of the proposals may be amended in the 2021 Finance Act. Clearly farm businesses will be paying increased tax; tax planning and regular consulting with the farm’s accountant will be important in the next few years.

For further information, contact SP McCaffrey & Co Accountants on 028 8224 1515.