With the government’s second budget of 2021 about to be unveiled, there are a few things that we know are coming, and a lot that we can only speculate about.
In the past, the government has said that the autumn statement isn’t when it will make tax changes, but the economic effects of the Covid-19 pandemic have altered this.
Of course, it’s impossible to accurately predict what we might see on October 27, but here are a few key changes that could be heading our way…
NICs and dividend tax rates increase
We already know that there will be a 1.25% increase in certain National Insurance contributions (NICs) from April 2022. This increase will apply to both class 1 NICs paid by employees and class 4 NICs paid by those who are self-employed.
It’s also been announced that there’ll be a 1.25% increase in dividend tax rates, meaning you’ll pay slightly more on dividend earnings over £2,000 for the year.
These changes will apply for one year, and are being introduced to create a ring-fenced fund for health and social care following Covid-19.
That this applies to salary, self-employment and dividend income is important. It means that incorporation is still generally more tax efficient than not.
Entrepreneurs’ Relief to stay
Given that we’ve already seen major changes to Entrepreneurs’ Relief (now known as Business Asset Disposal Relief), it’s likely that this will stay in its current form. Previously, a reduced tax rate of 10% applied on profits up to £10 million, but this was cut to £1 million from March 2020.
This means that practice owners will continue to pay 10% Capital Gains Tax (CGT) on profits up to £1 million. This is a lifetime limit, however, so if you’re disposing of multiple practices, you won’t be able to benefit during every sale.
Capital Gains increase
Rishi Sunak has already indicated that when it comes to funding future spending, he prefers tax rises to borrowing. It’s therefore very likely that this budget will see a significant increase in CGT.
This is an area that we know the government is already looking into, with internal studies currently taking place to determine how it can take CGT back to the drawing board. The Office of Tax Simplification has reviewed the system and made recommendations, with wholesale changes (and a hefty shakeup) expected in March 2022.
Given that the current rate of 20% is lower than it’s been historically, it’s probable that an increase is on the cards this autumn. There’s talk of aligning CGT with income tax, so we might expect a new rate of around 30%, which would mark a halfway point between the two and a return to previous levels (it was 28% in recent memory), which provides an easy positive spin for the government.
What can you do?
It’s always hard to predict the mitigation steps to take ahead of any new budget, but the best overall plan is to stay ahead of the game. And with wholesale changes to CGT likely coming in March, this is the time to begin preparing.
If you’re thinking about selling your practice, a key action could be maximising its value now. This may mean that you pay more tax in the short term, but that your final sale price is far higher.
As usual, we’ll post an overview of the confirmed changes and how they might affect you shortly after the Autumn Budget is announced. If you’re thinking of going to the market or are now beginning the sales process, and would like us to explain what any changes mean, do get in touch.
