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New Tax Year 2021: What Small Businesses Need To Know

Author Charlie BraithwaiteCharlie Braithwaite

6 min read
Money Talk

The recent budget will be much appreciated by thousands of businesses across the country, with reductions in VAT for the hospitality sectors, and the introduction of the ‘super deduction’ tax break, among others.

New Tax Year 2021: What Small Businesses Need To Know

British businesses have been slammed by a year’s worth of nationwide lockdowns. Fortunately, there’s good news at long last.  

Get updated on the UK 2021 Budget

We filter out what SMBs need to know.

The Chancellor’s recent budget represents a much-needed light at the end of the tunnel for UK small businesses. Its wide-ranging impact will be much appreciated by thousands of businesses across the country, with reductions in VAT for the hospitality sectors, and most importantly, the introduction of the ‘super deduction’ tax break (among other changes). Going forward, big businesses will bear an increasing load while SMBs should overall see their taxes lowered. That being said, it’s not quite as cut and dry as this.

How will your business be affected? Find out below.

If you’re a small medium business wanting to leave the burdensome paperwork admin behind, consider working with your own bookkeeper in the UK. Otherwise, read on.

Minimum and Living Wage

The minimum wage will be increased from April 2021, and for the first time, the National Living Wage has been extended to also include 23 and 24-year-olds. It was previously limited to those over 25.

  • National Living Wage (for people 23 and over): £8.91
  • National Minimum Wage (for people 21 to 22): £8.36
  • National Minimum Wage (for people 18 to 20): £6.56
  • National Minimum Wage (for people under 18): £4.62
  • Apprentice rate for people aged under 19, or those over this age but in the first year of their apprenticeship: £4.30

John, a 23-year-old student, works at a cafe on his university campus. Now that the National Living Wage includes 23-year-olds, and the Minimum Wage has also jumped, his pay will increase from £8.20 to £8.91 per hour.

National Insurance Contributions

National Insurance thresholds will also increase by 0.5% in line with CPI inflation, but the rates will stay the same. The government has been gradually increasing the Class 1 National Insurance threshold in order to eventually match it with the personal allowance.

The 2021-22 changes are as follows:

  • £9,568 or less (up from £9,500): 0%.
  • £9,569 to £50,270 (up from £50,000): 12%.
  • £50,270 and over (up from £50,000): 2%.

Benjamin Snipes earns £2,000 p/w as a private butler to an oil magnate.

He pays nothing on the first £184,

12% (£93.96) on earnings between £184.01 and £967

2% (£20.66) on the remaining earnings above £967

Total NIC contributions he has to pay is £114.62

Corporation Tax

There’s bad news for big businesses. In April 2023, corporation tax will be increased to 25% on profits over £250,000—though the Chancellor believes that this tax hike will only affect 10% of companies.

Small Profits Rate

But there’s good news for small businesses. The Small Profits Rate, applying to profits under £50,000, will remain at 19% as of April 2023.

For businesses with earnings between £50,000 and £250,000, there will be a new tiered tax rate as of April 2023, but as of yet, the Government hasn’t elaborated further.

Super-Deduction Capital Allowance

The new ‘super-deduction’ capital allowance aims to encourage businesses to invest in new technology. It can be used between 1 April 2021 until 31 March 2023.

The new capital allowances offer the following:

  1. The super deduction offers 130% first-year relief on qualifying new plant and machinery investments. Companies who invest in qualifying new plant and machinery assets can then reclaim the cost as a first-year capital allowance, plus 30% on top of that. That’s a whopping 130% of the cost of new machinery as a tax cut—meaning for every pound invested, their taxes are cut by 25p.
  2. 50% 1st year allowance, or FYA, for special rate assets, including long life assets.
  3. Annual Investment Allowance, or AIA, providing 100%relief for plant and machinery investments up to its highest ever £1 million threshold, untiil December 2021
  4. Within Freeport tax sites, companies can access new Enhanced Capital Allowances (ECA+) and companies, individuals and partnerships can benefit from an increased level of Structures & Buildings Allowance (SBA+) for investments until 30 September 2026

Equipment that qualifies for this ‘super deduction’ includes:

  • Computer equipment and servers.
  • Solar panels.
  • Compressors.
  • Foundry equipment.
  • Electric vehicle charge points.
  • Tractors, lorries, vans.
  • Ladders, drills, cranes.
  • Refrigeration units.
  • Office chairs and desks.

Hannah runs a private fertility clinic. She spends £10,000 on some shiny new refrigeration units. The new ‘super deduction’ means she can deduct 130% of the investment (£10,000 x 130% = £13,000) from her business’s taxable profits.

VAT Rates for 2021/22

With the exception of coronavirus business rates relief measures aimed at the retail, leisure, and hospitality sectors, the VAT rates won’t change as of April 2021. The VAT threshold of £85,000 will be frozen until 1 April 2024.

The government has also opened the gateway for the New Payment Scheme for VAT deferral amounts.

COVID Relief Measures

The government has also introduced significant tax changes aimed at helping businesses combat the long-term effects of COVID-19. Let’s take a look at these in more detail.

Standard Rate VAT

There will be a reduced standard VAT rate of 5% for businesses in the hospitality sector. This will be extended until the 30th September 2021. After that, a new 12.5% rate will be applied until the 31st March 2022. The 20% rate will continue from 1 April 2022.

Businesses that qualify include:

  • Food and non-alcoholic drinks (takeaways, cafes, bars, restaurants).
  • Hotels, B&Bs, camping and caravan sites.
  • Sites that charge an admission fee to attractions (heritage, theme parks, etc).

Gary’s campsite only has to charge 5% VAT on all bookings made before the 30th September 2021. After this date, he will charge 12.5% until the 31st March 2022, before charging the regular 20% rate from 1st April 2022 onwards.

Flat Rate VAT

There will also be a reduction in flat rate VAT for businesses in the hospitality sector.

  • Catering (including restaurants and takeaways): 4.5% until 30 September 2021, rising to 8.5% until 31 March 2022.
  • Hotel and accommodation (including B&Bs and camping sites): 0% until 30 September 2021, rising to 5.5% until 31 March 2022.
  • Pubs: 1% until 30 September 2021, rising to 4% until 31 March 2022.

IR35 changes

IR35 requires companies to identify ‘deemed employees’, contractors working for a company through a 3rd party intermediary personal services company (PSC), and ensure that they are taxed correctly.

IR35 was originally designed to make sure that contractors working for a company like a full-time employee would be taxed in the same manner as all other salaried employees. It was believed that tax-savvy employees were leaving their jobs to set up their own company, only to return to their former roles and reap the tax benefits of now operating as a company (rather than a salaried employee).  

Critics say it’s unfair: contractors will get taxed the same as regular employees without access to any of the benefits, but the Government claims that ‘genuine’ freelancers won’t be affected by the changes.

What’s the change?

As of April 1st 2021, medium and large businesses must determine if the IR35 applies to the contractors they hire. If so, they’ll be required to pay a ‘Deemed Employment Payment’, ensuring that the contractor pays the same amount of tax as a regular employee. The responsibility for assigning the ‘deemed employee’ status was originally in the hands of the PSC.

Luckily, the new rules don’t apply to small businesses. For small companies, the responsibility of assessing the IR35 status will remain with the contractor.

These changes will only apply if a company meets two of the following:

  • An annual turnover of more than £10.2 million.
  • A balance sheet of more than £5.1 million.
  • More than 50 employees.

They’ll also need to issue a ‘Status Determination Statement’, listing their ‘deemed’ contractor employees. Until they do, they’ll be liable for any unpaid tax, or National Insurance contributions.

HMRC have confirmed that clients won’t pay penalties for inaccuracies in the first 12 months relating to the off-payroll working rules (unless there’s evidence of deliberate non-compliance).

Sophie’s larger competitors now have to pay a ‘Deemed Employment Payment’ to their contractors and issue a ‘Status Determination Statement’ to HMRC. However, her company (consisting of 30 employees and with a turnover of £5 million per year) is small enough to be exempt from all IR35 requirements.

Takeaways

These new taxes aim to provide a significant boost for small businesses in struggling sectors. Big businesses—not SMBs—will shoulder the burden built by the unprecedented levels of government spending over the past 12 months.

Tip

If you’re still struggling to get to grips with these changes, don’t worry—that’s why we created Osome. With our comprehensive accounting platform, small business owners can spend more time growing their business and less time worrying about keeping books in order.

Ready to ditch the admin? If so, get in touch today and chat with one of our experts about your business’s accounting needs.

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