This is my UK Budget summary 2020. The following is a summary of the latest changes that are coming in. The excerpts that I include are those that affect contractors and small businesses.
Have a read of my article covering tax tips for contractors for handy tips you should know when you have your own business (this is a member only article and you can read it if you sign up as a member). This includes my latest advice for best tax planning ideas.
The personal allowance
As part of this UK Budget 2020 summary we take a look at the Personal Allowance which is currently £12,500. Budget 2018 announced that the allowance would remain at the same level in 2020/21 and then increase by CPI. There is a reduction in the personal allowance 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 and next tax year, there is no personal allowance where adjusted net income exceeds £125,000.
Tax bands and rates
Next in our summary of the UK Budget 2020 we will look at personal tax rates. The basic rate of tax is 20%. In 2019/20 and 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. Individuals pay tax at 45% on their income over £150,000.
The tax on income (other than savings and dividend income) is different, for taxpayers who are resident in Scotland, from taxpayers resident elsewhere in the UK. The Scottish income tax rates and bands apply to income, such as employment income, self-employed trade profits, and property income.
In 2019/20, there are five income tax rates, which range 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 2019/20, the threshold at which the 41% band applies is £43,430 for those who are entitled to the full personal allowance. The Scottish government has confirmed that the Scottish income tax rates will stay the same for 2020/21. The thresholds from which the 20% and 21% bands apply will be increased to £14,585 and £25,158, respectively, for those who are entitled to the full personal allowance.
From April 2019, the Welsh Government has the right to vary the rates of income tax payable by Welsh taxpayers. The UK government has reduced each of the three rates of income tax paid by Welsh taxpayers by 10 pence.
The Welsh Government set the Welsh rate of income tax at 10 pence, which they will add to the reduced rates. This change means the tax payable by Welsh taxpayers continues to be the same as that payable by English and Northern Irish taxpayers. The Welsh Government has confirmed that the income tax rate will remain at 10 pence for 2020/21.
Tax on savings income
Next in our summary of the UK Budget 2020 we will look at Savings Income. Such income will be interest received from 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. For higher rate taxpayers, the allowance is £500.
No allowance is due to additional rate taxpayers. Some individuals 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 (broadly earnings, pensions, trading profits, and property income less allocated allowances and reliefs) exceeds £5,000. Tax on dividends The first £2,000 of dividends is chargeable to tax at 0% (the Dividend Allowance). Dividends received above the allowance are taxed at the following rates:
- 7.5% for basic rate taxpayers
- 32.5% for higher rate taxpayers
- 38.1% for additional rate taxpayers.
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. When you work out which tax band dividends fall into, dividends are treated as the last type of income to be taxed.
National Insurance threshold
In our summary of the UK Budget 2020, we next turn to National Insurance. The government has recently announced National Insurance thresholds for 2020/21. Most thresholds will rise with inflation. Two thresholds, however, will increase by 10% from £8,632 to £9,500:
- the primary threshold -which sets the level at which employees start to pay Class 1 National Insurance contributions (NICs)
- the lower profits limit -this sets the level at which the self-employed start to pay Class 4 NICs.
The upper thresholds which apply to these two classes of NICs remain at £50,000.
The Employment Allowance provides businesses and charities with Relief from their employer NICs bill. Regulations have been issued to restrict the Employment Allowance, from 6 April 2020, to those employers whose employer NICs bill was below £100,000 in the previous tax year. Employers who are connected to other employers (such as companies within a group) will need to add together all of their employer Class 1 NICs liabilities incurred in the tax year prior to the year of claim to determine eligibility. The maximum Employment Allowance will be increased from £3,000 to £4,000 with effect from 6 April 2020.
From 6 April 2020, the Employment Allowance will operate as de minimis State aid. This change will mean it will count towards the total aid business is entitled to under the relevant de minimis State aid cap.
Loan Charge review
Next in our summary of the UK Budget 2020 we will take a look at the Loan Charge. This tackles disguised remuneration tax avoidance schemes. These are tax arrangements that seek to avoid income tax and NICs by paying income to individuals in the form of loans, usually via an offshore trust, with no expectation that the loans will ever be repaid. The charge applies to any loans made through disguised remuneration schemes after 6 April 1999, which had not been repaid by 5 April 2019.
Draft legislation has been issued to amend the scope of the Loan Charge:
- It will now only apply to outstanding balances of disguised remuneration loans made between 9 December 2010 and 5 April 2019 inclusive.
- It will not apply to loans made in tax years before 2016/17, where a reasonable disclosure of the use of a disguised remuneration tax avoidance scheme was made within the relevant tax return or associated documents where appropriate, and HMRC failed to take any action (for example by opening an enquiry).
- Those affected by the Loan Charge will be able to elect to split their loan balance over three consecutive years 2018/19 to 2020/21 (rather than the full charge arising in 2018/19).
- The date by which the additional information form must be returned to HMRC will move from 1 October 2019 to 1 October 2020. The form requires taxpayers to provide full information
to HMRC relating to any outstanding disguised remuneration loans for which they will need to make tax payments.
Increasing the flat-rate deduction for homeworking
Next in our summary of the UK Budget 2020, the government announced that it will increase the maximum flat-rate income tax deduction available to employees to cover additional household expenses from £4 per week to £6 per week where they work at home under homeworking arrangements. This change will take effect from April 2020.
Van benefit charge nil-rating for zero-emission vans
From April 2021, the government will apply a nil rate of tax to zero-emission vans within the van benefit charge.
Corporation tax rates
Next in our summary of the UK Budget 2020, we look at company tax. Corporation Tax rates have already been enacted for periods up to 31 March 2021. The primary rate of corporation tax is 19%. The rate for the Financial Year beginning on 1 April 2020 was due to fall to 17%, but the Chancellor has announced in the Budget 2020 that the rate will remain at 19%.
Capital gains tax (CGT) rates
The current rates of CGT are 10%, to the extent that any income tax basic rate band is available, and 20% thereafter. Higher rates of 18% and 28% apply for certain gains, mainly chargeable gains on residential properties, with the exception of any element that qualifies for Private Residence Relief. There are two specific types of disposal which potentially qualify for a 10% rate up to a lifetime limit for each individual:
- Entrepreneurs’ Relief (ER). This is targeted at directors and employees of companies who own at least 5% of the ordinary share capital in the company, provided other minimum criteria are also met, and the owners of unincorporated businesses.
- Investors’ Relief. The primary beneficiaries of this Relief are external investors in unquoted trading companies who have newly-subscribed shares. Investors’ Relief has a lifetime limit of £10 million; however, the lifetime limit position for ER has been changed in the Budget and is considered further below.
CGT annual exemption
The CGT annual exemption is £12,000 for 2019/20 and £12,300 for 2020/21.
Entrepreneurs’ Relief (ER)
Announced in the UK Budget 2020, the lifetime limit is reduced from £10 million to £1 million for ER qualifying disposals made on or after 11 March 2020. There are special provisions for disposals entered into before 11 March 2020 that have not been completed.
In summary for the UK Budget 2020, there are quite a few changes mentioned above to consider. In the main, the personal allowance, basic rate tax band and, tax rates, as well as the Corporation Tax rate is the same in 20/21 as it is for 19/20. Another surprise is that Entrepreneur’s Relief (ER) is still in place despite plenty of speculation prior to this. The Lifetime Allowance, however, for claiming for ER is reducing from £10 Million to £1 Million from 11 March 2020.
Link to Contractor Advice UK group on