New tax year: Key changes and initiatives for 2021/22

Accountants are calling the 2021/22 tax year, which began on 6 April 2021, one of the busiest ever from a tax point of view.

And that's on top of all the usual changes we might expect to occur, such as increases in tax rates.

In this article, we look at the major changes likely to affect the bottom line of your business.

Here's what it covers:

Wage and salary changes for 2021/22

Miscellaneous taxes in 2021

Corporation tax and capital allowance changes for 2021/22

VAT rates for 2021/22

Coronavirus tax measures for 2021/22

Brexit tax changes for 2021/22

IR35 changes

Wage and salary changes for 2021/22

As usual, there are increases in minimum wage amounts, and personal tax and National Insurance allowances for 2021/22.

Plus there are changes to the National Living Wage and the National Minimum Wage.

Minimum and living wage amounts

There are increases in the minimum wages you must pay to employees as of April 2021.

They were announced back in November 2020, following recommendations made by the Low Pay Commission in the previous month.

New to the 2021/22 tax year is that the National Living Wage is extended to 23 and 24-year-olds for the first time, having previously been limited to those aged 25 and older.

The minimum and living wage details are as follows:

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

Income tax personal allowance

The personal allowance and higher-rate thresholds increase marginally with the consumer prices index (CPI) as of April 2021, up to £12,570 and £50,270 respectively for the 2021/22 tax year.

And has been much discussed in the media, they're subsequently frozen until April 2026.

The income tax bands for the 2021/22 tax year are as follows:

• Personal allowance: Up to £12,570 (0% tax rate)
• Basic rate: £12,571 to £50,270 (20% tax rate)
• Higher rate: £50,271 to £150,000 (40% tax rate)
• Additional rate: More than £150,000 (45% tax rate)

National Insurance contributions

National Insurance contributions (NICs) rise in a similar way for 2021/22, with the Class 1 NICs (Primary Threshold/Lower Profits Limit) rising to £9,568.

However, with the exception of the Upper Earnings Limit (UEL)/Upper Profits Limit (UPL), as discussed below, this and other NICs are not pegged until 2026.

They may rise 'at future fiscal events', to quote the government's budget announcement.

The Upper Earnings Limit (UEL)/Upper Profits Limit (UPL) rises to £50,270 to match the aforementioned higher-rate threshold for income tax. And, like that increase, it's also pegged until April 2026.

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Miscellaneous taxes in 2021

Although not directly related to business, it's worth noting that the following personal tax allowances/thresholds not only do not increase in 2021/22, but are also frozen until April 2026:

• Inheritance tax thresholds
• Pensions lifetime allowance
• Capital gains tax annual exempt amounts.

Corporation tax and capital allowance changes for 2021/22

There's good and bad news here, spread out across the coming years.

Corporation tax

Let's start with the good news. There's no increase in corporation tax for the 2021/22 tax year, and there will almost certainly not be one in the 2022/23 tax year.

But that all changes in in April 2023, when corporation tax rises to 25% on profits over what will then be referred to as an Upper Profits Threshold of £250,000.

This is the first rise in corporation tax since 1974.

It won't be quite so bad if your business is smaller, because there's also now a lower threshold for corporation tax, with its own rate. Known as the Small Profits Rate, this will apply to profits under £50,000 and the rate will remain at 19% as of April 2023.

But for those with profits between £50,000 and £250,000, there will be a new tiered corporation tax rate for April 2023 onwards - however, the government has not yet revealed details of this.

Capital allowances

More good news is found in a new super-deduction capital allowance that can be used between 1 April 2021 until 31 March 2023.

This is set at 130%, and it means companies investing in qualifying new plant and machinery assets can claim back the cost as a first-year capital allowance, plus 30% on top of that. As the media has pointed out, this is like the government paying you to buy assets.

The goal is to encourage firms to invest and therefore grow.

There's also a further capital allowance measure that can be used by investing companies, who benefit from a 50% first-year allowance for qualifying special rate (including long life) assets.

VAT rates for 2021/22

The VAT rates don't change as of April 2021, with the exception of coronavirus relief measures discussed below aimed at hospitality sectors.

Nor does the VAT threshold change from £85,000 it's currently set at. In fact, the government announced in the 2021 Budget that the threshold is now locked until 1 April 2024.

Coronavirus tax measures for 2021/22

We take a look at government offerings for business around coronavirus in an in-depth blog, but here's a summary of the specific VAT changes happening in the new tax year.

The first is the reduced VAT rate of 5% for businesses in the hospitality sector.

This was launched in July 2020 and was due to end on 31 March 2021, but is once again extended - this time until 30 September 2021. Subsequent to that date, a new 12.5% rate will be applied until 31 March 2022. The 20% rate will resume from 1 April 2022.

You should take a look at our earlier blog for important notes about businesses that qualify for using this reduced rate, if you aren't already using it.

Flat rate VAT users in the hospitality sector also get some of this attention - the flat rate scheme reductions are as follows:

• Catering services: 4.5% until 30 September 2021, and 8.5% following this until 31 March 2022.
• Hotel and accommodation: 0% until 30 September 2021, and 5.5% following this until 31 March 2022.
• Pubs: 1% until 30 September 2021, and 4% following this until 31 March 2022.

Finally, although not new in the 2021 Budget, it's worth adding here that the government has opened the portal for the New Payment Scheme for VAT deferral amounts.

See our blog about the Winter Economy Plan for details of the New Payment Scheme.

Brexit tax changes for 2021/22

As we discuss in our free Business after Brexit guide, 1 January 2021 brought changes in the way VAT is handled for imports in the form of postponed VAT accounting.

However, none of this changes across the 2021/22 financial year. Brexit legislation doesn't directly change any other kind of business tax.

IR35 changes

As of April 2021, there are changes in how medium and large businesses have to handle the tax affairs of contractors who work for them. This is officially called Intermediaries Legislation, or the off-payroll working rule.

But it's better known by the informal title of IR35. This refers to an update message from HMRC that originally announced the rules back in 1999.

For more details you should consult our in-depth blog, but in summary IR35 is designed to identify 'disguised employees', also referred to as 'deemed employees'.

These are contractors who work at a company in the same way that full-time employees do.

However, the work is defined by a contractual agreement and the contractor invoices for hours worked through a third-party intermediary.

Most often this intermediary is a personal services company (PSC).

The big change is that, since 6 April 2021, medium and large businesses must determine if the IR35 apply to contractors they hire.

If so, they are required to pay a Deemed Employment Payment - essentially, ensuring the contractor pays the same amount of tax compared to a regular employee.

Final thoughts

The new financial year is interesting from a business tax perspective, with the government limiting hard-hitting measures yet making it clear that there's a bill to pay for ongoing coronavirus relief measures and disruption.

This bill will be paid in the financial years after 2021/22, and prudent businesses will use the wait until then to get their affairs in order so they're in the best possible position to be ready for when that time comes.

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