Important inflation and tax changes that may impact your business

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inflation and tax changes for businesses
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Inflation, tax rises – and the family budget

Apart from the human cost, covid has cost us all a great deal. In the first year of the pandemic, from April 2020 to 2021, the government borrowed £299bn, the highest figure since records began in 1946. Another £200bn will be needed this year, and as taxpayers, we will be paying for it all.

But the covid costs don’t stop there. The low interest rates vital to restart the economy are also helping to restart inflation.

So, what does this all mean for the budget?

Inflation is back

Inflation is a measure of rising prices and affects what you can buy for your money. Covid and lockdown reduced economic activity, eliminating the inflationary pressures that were becoming a worry at the beginning of 2020. The cost of some goods fell early in the pandemic in response to a collapse in demand.

Now, as the economy starts to recover, pent-up demand and supply chain bottlenecks are already creating severe price pressures. There are already shortages in some key sectors such as semiconductors. Scarcity inevitably means price increases.

It looks as though the process of inflation has already begun, when earlier in the year, inflation data was released the figures were higher than expected, passing the 2% mark. Now it is forecast to potentially increase to over 5% by 2022, well above the Bank of England’s 2% target. The typical household spent just over £20,000 in 2019, the last pre-Covid year, according to the Office for National Statistics (ONS). Inflation rises would push up the bill for those same goods and services substantially.

National insurance and taxes are going up

National insurance contributions (NICs) paid by both employed and self-employed workers will rise by 1.25% in a bid to help fund health and social care costs. From 2023, the health and social care levy element will then be separated out and the exact amount employees pay will be visible on their pay slips. It will be paid by all working adults, including workers over the state pension age – unlike other NICs.

This means an employed basic rate taxpayer earning £24,100 a year would contribute an extra £180, while a higher rate taxpayer earning the median higher rate taxpayers income of £67,100 a year would pay £715.

In the March Budget there were minor increases to the £12,500 – and £50,000 – income tax thresholds to £12,570 and £50,270 respectively but these are frozen until 2026. These thresholds – which determine how much a person can earn before paying income tax, and who will pay at the higher 40% rate – usually rise with inflation, now they will not. So, we could all be paying more tax over the next 5 years.

All these increases add up to increased pressure on the family budget with higher prices and more taxes. Wages may be on the up – but probably not by enough to compensate for the added costs and tax rises.

Dividend tax rates are going up

The government also announced a tax increase on dividends at the same rate as the rise in national insurance at, therefore from April 2022 you can expect to pay more tax on your dividend income.

The basic rate dividend tax will rise from 7.5% to 8.75%, higher rate will rise from 32.5% to 33.75% and the additional rate will rise from 38.15% to 39.35%.

Super-deduction for new equipment

Finance Act 2021 legislated for the temporary 130% super-deduction for companies acquiring new plant and machinery announced in the Spring 2021 Budget. This applies where the expenditure is incurred between 1 April 2021 and 31 March 2023.

This means that a new machine that cost £100,000 will reduce the company’s profits for corporation tax purposes by £130,000, saving £24,700 in corporation tax (at 19%). However, there is a clawback charge when the specific asset is disposed of as it needs to be separately identified and not pooled.

The 130% allowance is available where the equipment would normally be included in the general plant and machinery pool. Where the equipment would normally be included in the special rate pool, typically integral features such as air conditioning units, then a 50% allowance is available.

The HMRC guidance sets out detailed conditions for claiming the new tax relief and clarifies that the super-deduction does not apply to motor cars and leasing business among other exclusions.

Where equipment such as lifts, heating systems and air conditioning is installed in a building that is rented out the leasing restriction does not apply.

Note also that there is the 100% Annual Investment Allowance for up to £1 million of expenditure per annum. This was due to revert to just £200,000 from 1 January 2022 but was extended to 31 March 2023 in the Autumn 2021 Budget. See here for more information.

Contact Treetops for business planning

Please talk to us about planning ahead because with some help you may be able to make your money work harder for you and reduce the amount the taxman can take.

Your financial plans may need a fresh look, and you may need an accounting expert to help you. We are ready to provide all the help you need.

Tom McManners
Tom McManners BSc ACA ACMI

Tom is a Chartered Accountant and Senior Statutory Auditor. He is also the Director at Treetops. For more accounting advice please call or complete our website contact form:

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Treetops is an established Chartered Accounting firm based in Farnborough, Hampshire. We have clients locally and nationally. For advice and a free consultation please contact us.

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