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New tax year: Key changes and initiatives for 2020/21

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The tax year for 2020/21 introduces not just a handful of changes to existing taxes for businesses and individuals, but also brings in new rules on how certain kinds of employees should be paid.

Here are highlights of the main changes.

Minimum wages

The National Living Wage has risen by 6.2%, ushering in a minimum rate for workers over the age of 25 of £8.72 an hour.

The government forecasts the National Living Wage will rise to £10.50 by 2024.

To remind you, the National Minimum Wage rates – of which the National Living Wage is effectively the top tier – are the least an employer is legally required to pay workers or employees.

You can pay more, of course, but you can’t pay less. Effectively, this is a mandatory requirement.

The government says this year’s 6.2% rise is the largest ever increase in the National Living Wage. However, it isn’t actually the biggest increase for 2020/21 among the mandated minimum wage rates for employees and workers.

Here are the other increases:

  • 21-24 year olds: 6.5% increase from £7.70 to £8.20
  • 18-20 year olds: 4.9% increase from £6.15 to £6.45
  • Under 18s: 4.6% increase from £4.35 to £4.55
  • Apprentices: 6.4% increase from £3.90 to £4.15

Retail rate discounts

For the 2020/21 tax year, the retail discount scheme that sees some shops pay lower rates is being raised to 50%. Previously, the 2019/20 tax year saw a discount of a third in rates for eligible businesses.

This new discount applies to occupied retail properties with a rateable value of less than £51,000 – shops, restaurants, cafes, and drinking establishments. New for 2020/21 are the inclusion of cinemas and live music venues.

The definition of shops includes those offering certain services, such as nail bars or hairdressers. Notably, not included are outlets involved with cash (banks, pawn brokers, etc), or certain services such as estate agencies, accountancy practices and financial advisers.

It’s best to check the government’s guidelines for specific details.

But there’s even better news for smaller pubs, which, in addition to the above, can claim a further £1,000 relief from their business rates.

The government says means-eligible pubs with a rateable value below £51,000 will get £13,500 off their annual bills. Pubs with a higher rateable value but below £100,000 will be limited to just the £1,000 relief.

Local councils administer the rate decreases.

In the Queen’s Speech, the government said it is “committed to conducting a fundamental review of business rates”, which includes more frequent reviews (three-yearly, rather than five-yearly).

Farming subsidies following Brexit

Although not a measure for the new tax year, the government has announced it’s providing £3bn in funding for farmers and rural communities in 2020.

This will supplement European Union (EU) funding until 2023, at the latest, following the UK leaving the EU and therefore having left the Common Agricultural Policy (CAP).

National Insurance and Personal Allowance increases

In the Queen’s Speech, the government announced it’s raising the National Insurance threshold to £9,500 from the 2020/21 tax year. In other words, employees earning less than this will pay no National Insurance, while other employees will pay National Insurance contributions only on earnings over £9,500.

Pending any further announcement in the forthcoming Spring Budget, Personal Allowance within England and Wales is likely to remain the same as 2019, at £12,500.

Similarly, the basic rate will probably stay the same at £37,500, as will the higher rate of £50,000. The lack of a rise is down to increases for 2020 being brought forward and implemented in 2019.

As for income tax and the amount of National Insurance contributions, the government says it’s committed to not increase them.

Powers to set income tax in Scotland have rested with Holyrood since 2016. In the recent Scottish budget, it was announced that there are no plans to increase income tax for 2020/21.

However, Scotland has different personal allowance bands, and these are to be adjusted in 2020/21, as follows:

  • Starter rate (£12,501 – £14,585): 19%
  • Scottish Basic rate (£14,586 – £25,158): 20%
  • Intermediate rate (£25,159 – £43,430): 21%
  • Higher rate (£43,431 – £150,000): 41%
  • Top rate (£150,00+): 46%

VAT rises

As with income tax and National Insurance, the government says it has committed not to increase VAT, so it should stay at the current standard rate of 20%, reduced rate of 5%, and zero rate of 0%.

VAT reverse charge for construction

Originally intended to be introduced in October 2019, the VAT reverse charge for construction was postponed by a year, meaning it will now come into effect in October 2020.

Only affecting those already enrolled in the Construction Industry Scheme (CIS), the new rules mean sub-contractors providing services to a VAT-registered customer will no longer have to account for the VAT.

Instead, the customer will account for the VAT – that is, it will be considered input tax for them, as if they’ve made the supply to themselves.

This is a big shake up for sub-contractors, but more so for the companies that employ them who have additional requirements for their VAT accounting.

It will impact sub-contractor cash flows, because the VAT held until quarterly returns will no longer be available for contingencies (HMRC advises sub=contractors to switch to monthly reporting to ease this pain).

Inversely, it could give those who employ sub-contractors a cash flow boost.

Read more about the VAT reverse charge for construction


Landlord tax breaks

As of 1 April 2020, the changes in finance cost tax relief for landlords of residential properties reaches completion, following its phased introduction back in 2017’s budget.

It means the percentage of basic rate income tax relief reaches 100% for finance costs, property profits or adjusted total income exceeding personal allowance (whichever is lower).

The percentage of finance costs it’s possible to deduct from rental income becomes 0%.

For most landlords, this means interest charges on a mortgage are no longer deductible as an allowable expense. Instead, landlords can claim a basic rate deduction (currently 20%).

This change in how property income is taxed can push some earners into the higher rate for income tax, and also mean couples claiming child benefit may have to pay the High Income Child Benefit Charge.

For more information, take a look at HMRC’s property manual.

IR35 changes for contractors and businesses

As of 1 April 2021, medium and large-sized businesses are required to carry out IR35 checks. This was intended to begin in April 2020 but has been delayed by the government.

This removes the requirement of the contractor working for such businesses to self-determine, but might also bring profound administrative challenges when it comes to compliance.

IR35 is legislation intended to identify ‘disguised employees’. These are contractors who work at a company in the same way that full-time employees do.

But because they’re a contractor working through a personal services company (PSC), they pay less tax and National Insurance.

Previously the contractor themselves had to make this determination, although a few years ago a similar change in legislation meant public service employers, such as councils, became required to make the determination.

If it’s determined the contractor is indeed a disguised employee, the organisation that pays them via their PSC will have to deduct the same tax and National Insurance contributions.

Essentially, this means adding the individual to the payroll – something that has additional administrative consequences for employers.

Conclusion

This isn’t a big year for tax changes, which is perhaps understandable given the uncertainty around Brexit and preparations for the end of the transition period.

However, there are some adjustments that business and especially payroll departments have to be aware of.

Editor’s note: This article was first published in March 2020 and has been updated for relevance.

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