UK 2021 Budget: How will freelancers, contractors and small businesses be impacted?
As we approach 12-month since the coronavirus pandemic put the UK into lockdown, a year on, many businesses and self-employed professionals are still struggling.
Reassuringly, the 2021 Budget announcement has confirmed that government support for the self-employed will be extended until September 2021.
Covering 80% of lost earnings, up to £2,500 per month, grants four and five of the Self-Employment Income Support Scheme (SEISS), are now also open to a further 600,000 newly self-employed individuals.
Grants available to the newly self-employed
Newly self-employed individuals who were previously ineligible for grants one to three, will now be able to claim grants four and five, given they filed a tax return by Midnight on 2nd March, 2021.
Grant four will cover up to 80% of average trading profits1, from February to April 2021. Online applications will be open from late April.
Grant five will cover the three months from May to September 2021, with applications open from late July.
As the economy reopens in the summer, those whose turnover has fallen by 30% or more will continue receiving the full 80% grant. For those whose turnover has fallen by less than 30%, they will be eligible to receive a grant of 30%1.
While grants supporting a further 600,000 self-employed individuals comes as positive news1, there are still 2.5 million self-employed people ineligible for government support, as highlighted on Politics Live by the Institute of Fiscal Studies. It’s believed that at least 1.5 million of these individuals could easily be included.
Since lockdown began in March 2020, what help has there been for the self-employed?
The Chancellor first announced the launch of the Self-Employment Income Support Scheme at the beginning of the pandemic, in March 2020.
If a self-employed person, or those in partnerships, suffered a loss in income, they were paid up to 80% of their profits, up to £2,500 per month.
This grant was only offered to those who had been trading for the 2018-2019 financial year and planned to continue trading but had been negatively impacted by the Coronavirus pandemic.
This meant that those who had more recently embarked on self-employment were not eligible for support.
Initially, the grant was provided as a lump sum to cover three months. This was followed by the announcement of a second and final payment in May 2020, covering 70% of profits up to £2,190 for three months.
This however proved not to be the final payment, as the effects of the pandemic continued for longer than anticipated.
To date, the government have spent £33bn supporting the self-employed during the crisis.
Businesses have too been able to benefit from the government backed support loans.
Unlike grants, loans lead to increased debt which many self-employed business owners are cautious of, due to concerns that their businesses would not recover once lockdown restrictions are lifted.
Will taxes increase for the self-employed?
Fortunately, freelancers and contractors will not have to pay increased taxes. Still, IR35, which was not addressed in the 2021 Budget, will go ahead despite hopes of a delay.
It has been alleged that the Chancellor could be looking to introduce a new tax band for owner/managed limited companies with ‘one clear client’. At first glance, this seems to be an addition to private sector IR35 changes - a ‘catch-all’ to ensure those PSC’s who work for one client, but have been determined as outside IR35, still pay more tax.
Many self-employed workers are still voicing concerns that businesses are finding the IR35 changes too complicated to manage, which as a result could mean that the contractors themselves will be the ones to suffer increased tax bills and potential fines relevant to previous contractual engagements.
With a potential £1.3bn of extra tax revenue on offer by 2023/24, it’s no surprise that a further delay to the IR35 changes is not on the government’s agenda.
The chancellor announced that £100million will be spent on creating a new HMRC taskforce, to tackle furlough fraud and tax evasion.
It’s important to note that sole traders are not affected by the upcoming April 2021 IR35 changes. Sole traders are freelance professionals who run their own business as an individual and are personally responsible for the losses their business makes. As they do not operate through a limited company structure, they are exempt from the upcoming private sector IR35 reforms.
In IPSE’s last quarterly Freelancer 2020 Q4 Confidence Index2, they saw low freelancer confidence based on critical factors including the state of the UK economy, the negative effect of Coronavirus and tax regulations, especially with private sector IR35 changes going ahead next month.
The study also discovered that many freelancers expect that lowering their day rates in the coming year will be necessary for securing new work.
Given this, it’s clear that despite the support provided by the government during this pandemic, it may not be enough for freelancers to come out of this unaffected.
Above all to thrive, freelancers need the availability of work opportunities which are brought about by a strong economy. Encouragingly, this Budget appears to be addressing the needs of businesses, which will aid them in getting back on track to full recovery.
National Insurance and VAT frozen
The chancellor announced that National Insurance and VAT thresholds are being frozen this year.
On income tax, the threshold for paying the basic rate will rise to £12,570, and for higher-rate payers the threshold will rise to £50,570 from April 2021.
These threshold freezes will still help to increase income tax revenues for the treasury (up to £8bn), with almost one million additional people set to pay more income tax by 20263, partly due to pay rises pushing middle to high earners above the thresholds.
Corporation tax will stay at 19% for companies recording profits of under £50,000, while corporation tax will rise to 25% for businesses recording profits over £250,0004, from 2023.
The Chancellor confirmed that the business rates holiday will be extended through to the end of June, saying: “For the remaining nine months of the year, business rates will still be discounted by two-thirds, up to a value of £2m for closed businesses, with a lower cap for those who have been able to stay open”.
The VAT threshold will remain at £85,000 until 2024 while the 5% reduced rate of VAT will be extended for six months to 30th September 2021, followed by an interim rate of 12.5% for the next six months. The standard rate of VAT will not resume until April 2022.
The new ‘super deduction’
The Chancellor announced a ‘super deduction’ - a new increased temporary tax relief for companies who invest in certain qualifying assets from 1st April, 2021. The incentive is expected to stimulate up to £25bn of investment in the UK5.
The measure will permit a temporary first year allowance including a super-deduction of 130% on most new plant and machinery investments which usually only qualify for 18% relief, and a 50% allowance on new plant and machinery investments that ordinarily qualify for only 6% relief.
To give an example, according to PwC, a manufacturer earning £10m of expenditure on new factory could receive and additional £1m of cash tax saving over the two years that the measure is in place5.
Increased funding for Wales, Scotland, and Northern Ireland
Through the Barnett formula, the Chancellor says he is increasing funding for the devolved administrations by £1.2bn for the Scottish government; £740million for the Welsh government; and £410million for the Northern Ireland executive.
When will the economy return to pre-Covid levels?
Official forecasts by the Office for Budget Responsibility (OBR) predict quicker growth than originally expected, with 4% growth in 2021, allowing the economy to get back to pre-Covid levels six months earlier than previously believed.
Growth is expected to strengthen further in 2022 through growth of 7.3% before dropping to more realistic growth levels of 1.7% in 2023, 1.6% in 2024, and 1.7% in 2025.
The UK’s speedy Coronavirus vaccine roll-out will help enable a ‘swifter and more sustained’ economic recovery, says the chancellor while also admitting that repairing the long-term damage to the economy ‘will take time’.
The opposition and business associations comment
The leader of the opposition, Sir Kier Starmer, labelled it a Budget that ‘papers over the cracks’ rather than rebuilding the foundations for the future, adding that there were ‘very few silver linings’.
The CBI (Confederation of Business Industry) has welcomed many of the Chancellor’s announcements, especially the super-deduction, but did not express positivity over the rise in Corporation Tax. They feel it ‘sends a worrying signal to those planning to invest in the UK’.
APSCO (Association of Professional Staffing Companies) have welcomed extension of the furlough scheme and the announcement of a new recovery loan scheme to replace the Bounce Back support. They also stated concerns over the impact that IR35 will have on the recruitment industry from 6th April, 2021.
The challenge ahead for the Chancellor will be ensuring his policies meet the task of recovering the UK’s economy and social structure.
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