Spring Budget 2021 – Income Tax Rates & Allowances

It has been confirmed as part of the Budget announcements that the 2021-22 personal allowance will increase to £12,570 (2020-21: £12,500) and the basic rate limit to £37,700 (2020-21: £37,500). As a result, the higher rate threshold will increase to £50,270 (2020-21: £50,000) from 6 April 2021.

The Chancellor, Rishi Sunak revealed that these rates will be frozen until April 2026. This freeze is part of the Chancellor’s approach to improve public finances. This means that the allowances will not increase in line with inflation creating a stealth increase in the limits.

The basic rate limit currently applies to non-savings and non-dividend income in England, Wales and Northern Ireland and to savings and dividend income across the UK. The Scottish Parliament sets the basic rate and higher rate thresholds for non-savings and non-dividend income in Scotland. Changes to the Scottish bands were announced on 28 January 2021 as part of the Scottish Budget measures.

For high earning taxpayers the personal allowance is gradually withdrawn by £1 for every £2 of adjusted net income over £100,000 irrespective of age. Adjusted net income is total taxable income before any personal allowances, less certain tax reliefs such as trading losses and certain charitable donations and pension contributions. Any taxpayers with an adjusted net income of between £100,000 and £125,140 in 2021-22 will pay an effective marginal rate of tax of around 60% as the tax-free personal allowance is gradually withdrawn.

Marriage Allowance tax break

If you are entitled to the marriage allowance and have not yet applied, then you could receive a payment of up to £1,188 from HMRC. HMRC used the occasion of Valentine’s Day to remind couples to make a claim.

The marriage allowance is available to qualifying married couples and those in a civil partnership where a spouse or civil partner is a non-taxpayer i.e., has an income below their personal allowance (currently £12,500). The allowance permits the lower earning partner to transfer up to £1,250 of their personal tax-free allowance to their spouse or civil partner. The marriage allowance can only be used when the recipient of the transfer (the higher earning partner) does not pay more than the basic 20% rate of Income Tax. This would usually mean that their income is between £12,500 to £50,000 for 2020-21. The limits are somewhat different if you live in Scotland.

If you meet the eligibility requirements and have not yet claimed the allowance, then you can backdate your claim. If you claim now you can backdate your claim for up to four years as well as claim for the current tax year. This could result in a total tax break of up to £1,188 for 2016-17, 2017-18, 2018-19, 2019-20 as well as the current 2020-21 tax year. The deadline for backdating an eligible claim to 2016-17 is 5 April 2021.

Did you miss the Self-Assessment deadline?

HMRC has announced that more than 10.7 million people submitted their 2019-20 Self-Assessment tax returns by the 31 January deadline. This leaves over 1.8 million taxpayers that have missed the deadline and are yet to file. Are you among those that missed the 31 January 2021 filing deadline for your 2019-20 Self-Assessment returns?

HMRC had announced that due to the coronavirus pandemic, fines for taxpayers that file their Self-Assessment returns late will be waived until 28 February 2021. However, interest will be applied to any outstanding balance from 1 February 2021 so you should try and pay your tax bill as soon as possible. If you are unable to pay your tax bill, then there are a number of options for you to defer the payment that was due on 31 January 2021.

This includes an option to set up an online time to pay payment plan to spread the cost tax due on 31 January 2021 for up to 12 months. This option is available for debts up to £30,000 and the payment plan needs to be set up no later than 60 days after the due date of a debt. This should be done sooner rather than later as a 5% late payment penalty will be charged if tax remains outstanding, and a payment plan has not been set up, before 3 March 2021.

If you owe Self-Assessment tax payments of over £30,000 or need longer than 12 months to pay in full, you can still apply to set up a time to pay arrangement with HMRC, but this cannot be done using the online service.

Scottish Budget Statement 2021-22

Scotland’s Finance Secretary, Kate Forbes delivered her second Budget statement to the Scottish parliament on 28 January 2021. The date was selected to allow the Scottish Government time to deliver their Budget and have it approved before the start of the next tax year. This is the second time that Scotland has held a Budget before the rest of the UK. The UK Budget is scheduled to take place on Wednesday, 3 March 2021.

The Finance Secretary commented that the ‘Budget will help to bring much needed support and stability, to ensure our economy recovers and we protect those who have been hit the hardest’.

The main measures announced in the Budget included an extension to the 100% non-domestic rates relief for retail, hospitality and leisure businesses for a further three months and a reduction in the non-domestic rates tax rate applicable to all businesses by 0.8p to 49p. The Budget announcements also confirmed that ceiling for the nil rate band for residential land and buildings transaction tax (LBTT) will revert to £145,000 from 1 April, as planned. The standard rate of Scottish landfill tax will rise to £96.70 per tonne and the lower rate to £3.10 per tonne in line with the expected increases in other parts of the UK.

It was also announced that there would be no change in income tax rates and that the thresholds would increase in line with inflation. 

The proposed Scottish rates and bands for 2021-22 are as follows:

Starter rate – 19% £12,571 – £14,667
Basic rate – 20% £14,668 – £25,296
Intermediate rate – 21% £25,297 – £43,662
Higher rate – 41% £43,663 – £150,000
Additional rate – 46% Above £150,000

The Budget measures are subject to approval by the Scottish parliament and may possibly be revised following the UK Budget. 

Claims to adjust payments on account

Self-Assessment taxpayers are usually required to pay their Income Tax liabilities in three instalments each year. The first two payments are due on:

  • 31 January during the tax year e.g., for 2020-21 the first payment on account was due on 31 January 2021.
  • 31 July following the tax year e.g., for 2020-21 the second payment on account is due on 31 July 2021.

These payments on account are based on 50% each of the previous year’s net Income Tax liability. In addition, the third (or only) payment of tax will be due on 31 January following the end of the tax year.

There is no requirement to make payments on account where your net Income Tax liability for the previous tax year is less than £1,000 or if more than 80% of that year’s tax liability has been collected at source.

The payments are based on 50% of your previous year’s net Income Tax liability. If you think that your income for the next tax year will be lower than the previous tax year, you can apply to have your payment on account reduced. This can be done using HMRC’s online service or by completing form SA303.

HMRC’s internal manuals are clear that a reason for requesting a reduction in the payments on account must be given. A request without a reason is not a valid claim.

There are no restrictions on the number of claims to adjust payments on account a taxpayer or agent can make. However, there is a time limit which means that the claim must be received before the 31 January following the tax year in question. There is no requirement to notify HMRC if your taxable profits have increased year on year.

Keeping pay and tax records

Following the 31 January 2021 deadline for submission of Self-Assessment tax returns for 2019-20, it can be a useful exercise to review the rules for keeping your pay and tax records. There are no set rules for how to keep your records, but you must usually hold them on paper, digitally or as part of a software program.

If you are keeping records used to complete a personal (non-business) Self-Assessment tax return, you must keep records for 22 months from the end of the tax year to which they relate. This means that you should keep all records for the tax year ended 5th April 2020 until at least the end of January 2022. If you file a late Self-Assessment return then you will need to keep your records for at least 15 months after the date you filed the tax return. 

The types of records you should keep include those relating to:

  • Income from employment e.g., P60, P45 or form P11D forms.
  • Expense records if you’ve had to pay for things like tools, travel or specialist clothing for work.
  • Income from employee share schemes or share-related benefits.
  • Savings, investments and pensions e.g., statements of interest and income from your savings and investments.
  • Pension income e.g., details of pensions (including State Pension) and any tax deductions.
  • Rental income e.g., rent received and details of allowable expenses.
  • Any income which is open to Capital Gains Tax.
  • Foreign income.
  • State benefits.

Please note, this is not a complete list and you should retain any other important records that were used in preparing your Self-Assessment return. 

If you need to keep records for other reasons, there are different time limits for retaining them. For example, self-employed individuals must keep business records for at least 5 years from the 31 January submission deadline for the relevant tax year. This means that for the 2019-20 tax year where online filing was due by 31 January 2021 you must keep your records until at least the end of January 2026. There are penalties for failing to keep proper records or for keeping inaccurate records. 

No late online filing penalties until 28 February 2021

HMRC has announced that fines for taxpayers that file their Self-Assessment returns late will be waived until 28 February 2021. The filing deadline for 2019-20 returns remains at 31 January 2021. HMRC is still encouraging taxpayers to try and meet this deadline. Taxpayers remain obliged to pay their tax bill by 31 January and interest will be charged from 1 February 2021 on any outstanding liabilities.

There has been heavy lobbying from the accountancy industry and other interested parties asking the government to soften its stance on late filing penalties in view of the pandemic situation and inadequate helpline capacity. The confirmation that no late filing penalty will be issued, giving one month’s grace has been broadly welcomed. 

HMRC expects more than 12.1 million people to complete a Self-Assessment tax return for the 2019-20 and almost 9 million returns have already been submitted. 

HMRC’s Chief Executive, Jim Harra, said:

‘We recognise the immense pressure that many people are facing in these unprecedented times and it has become increasingly clear that some people will not be able to file their return by 31 January.

Not charging late filing penalties for late online tax returns submitted in February will give them the breathing space they need to complete and file their returns, without worrying about receiving a penalty.

We can reasonably assume most of these people will have a valid reason for filing late, caused by the pandemic.’

There are also a number of options for taxpayers to defer payments due on 31 January 2021 and pay by instalments over 12 months. This includes a self-serve Time to Pay facility online for debts up to £30,000 or by making an arrangement with HMRC.

Making good fuel provided for private motoring

Where an employee with a company car is provided with fuel for their own private use by their employer, the default position is that the employee is required to pay the car fuel benefit charge. The charge is determined by reference to the CO2 rating of the car, applied to the car fuel benefit multiplier, currently £24,500.

The car fuel benefit charge is not applicable when the employee pays for all their private fuel. This is known as ‘making good’. Private fuel includes the fuel used commuting to and from work. Employees should keep a log of private mileage and use the published advisory fuel rates to repay the cost of fuel used for private travel. The advisory fuel rates are intended to reflect actual average fuel costs and are updated quarterly.

If private fuel costs are repaid to the employer, HMRC will accept that there is no car fuel benefit charge. It will usually be cheaper to repay your employer for private fuel than to pay the Income Tax charge, especially if private mileage is relatively low.

The car-fuel benefit charge will still be payable if it cannot be demonstrated to HMRC that the driver of the car has paid for all fuel used for private journeys, this includes commuting to and from work. To ensure that this does not occur, employees will need to keep a log of private mileage and ensure that they make good the cost of all fuel provided for private use.

Drifting into the HICBC

The High Income Child Benefit Charge (HICBC) could apply to your clients if their income exceeds £50,000 for the first time this year and they are in receipt of child benefit. The charge effectively claws back the financial benefit of receiving child benefit either by reducing or removing the benefit entirely.

If a taxpayer (or their partner) exceeded the £50,000 threshold for the first time during the current tax year (2020-21) then they must act. If both partners have an income that exceeds £50,000, the charge will apply to the partner with the highest income.

Taxpayers that continue to receive child benefit (and earn over the relevant limits) must pay any tax owed for 2020-21 on or before 31 January 2022. The child benefit charge is charged at the rate of 1% of the full child benefit award for each £100 of income between £50,000 and £60,000. If income exceeds £60,000, the amount of the charge will equal the amount of child benefit received.

If the HICBC applies it is usually still beneficial to claim Child Benefit as it can help to protect State Pension entitlement and will make sure the taxpayer's child receives a National Insurance number. However, taxpayers have the choice to keep receiving child benefit and pay the tax charge or elect to stop receiving child benefit and not pay the charge.

Online tax payment plans

New figures published by HMRC have revealed that some 25,000 taxpayers have set up an online payment plan to manage their tax liabilities spreading payments of £69 million for up to 12 monthly instalments.

This follows an increase in the limit for making an online payment plan to £30,000 (previously £10,000) that took effect from 1 October 2020. Taxpayers with outstanding tax liabilities may be eligible to receive support with their tax affairs by using this service.

The deadline for submitting your 2019-20 Self-Assessment tax returns online is 31 January 2021. Once a return has been submitted you can use the self-serve facility to set up monthly direct debits and spread the cost of your tax bill. The payment plan needs to be set up no later than 60 days after the due date of the debt.

In order to use the online payment plan you must meet the following requirements:

  • Have no outstanding tax returns
  • No other tax debts
  • No other HMRC payment plans set up.

In addition, your debt needs to be between £32 and £30,000. You can choose how much to pay straight away and how much you want to pay each month. Interest will be applied to any outstanding balance from 1 February 2021.

Taxpayers with Self-Assessment tax payments of over £30,000, or who need longer than 12 months to pay in full, can still apply to set up a time to pay arrangement by calling the Self-Assessment payment helpline or the dedicated COVID-19 helpline.