Budget March 2020: what does it mean for low-income people?
The March 2020 Budget focused on announcements to help businesses and individuals cope financially during the coronavirus outbreak and build prosperity for the future. But which tax and related announcements in particular should those on low incomes be aware of?
We explore some of the key facts and figures below.
Support in relation to coronavirus (COVID-19)
Personal Allowance and Higher Rate Threshold
National Insurance contributions
Universal Credit changes
Benefits and children
Household expenses deduction for employees who work from home
Review of changes to the off-payroll working rules
Response to the independent loan charge review
Other employer issues
Savings tax 2020/21
Capital Gains Tax
Income tax treatment of social security income
Conditionality and the hidden economy
Breathing space for people in debt
Guidance for the self-employed
Net pay arrangements for pensions
Review of Making Tax Digital for VAT
As part of the government’s response to coronavirus, in addition to confirming a number of previously announced measures, the Chancellor set out a variety of other reliefs, to support individuals and businesses financially.
There was confirmation that the forthcoming COVID-19 Bill will temporarily give most employees and workers entitlement to statutory sick pay (SSP) from the first day of sickness absence, rather than the fourth day. This will apply to people who either:
- have COVID-19; or
- have to self‑isolate, in accordance with government guidelines.
The Budget added further measures to widen the scope of SSP and make it more accessible. The government will temporarily extend SSP to cover:
- individuals who are unable to work because they have been advised to self-isolate, and
- people caring for those within the same household who display COVID-19 symptoms and have been told to self-isolate.
There will also be changes to the medical evidence requirements for SSP.
However, self-employed people and employees earning below the National Insurance contributions Lower Earnings Limit (£120 per week for 2020/21) are not entitled to SSP. To support these groups, the Chancellor announced that it would be quicker and easier to receive certain benefits:
- ‘new style’ Employment and Support Allowance will be payable for people directly affected by COVID-19 or self-isolating according to government advice from the first day of sickness, rather than the eighth day;
- people will be able to claim universal credit and access advance payments where they are directly affected by COVID-19 (or self-isolating), without meeting the current requirement to attend a jobcentre;
- for the duration of the outbreak, the requirements of the minimum income floor in universal credit (UC) will be temporarily relaxed for those directly affected by COVID-19 or self-isolating according to government advice.
These are all welcome announcements. It should be noted that the measures will be in place temporarily, and it is unknown as yet as to how long that means. We will be looking in more detail at the virus sick pay provision and some of the complexities that can arise, in a forthcoming article.
Of course, it is not only individuals that will be affected by coronavirus – some businesses may face problems. There were also some announcements aimed at providing support to businesses. The hope is that they will help businesses cope with cashflow problems and protect jobs.
The burden of SSP generally falls on employers. Further to the announcements extending SSP for those individuals affected by coronavirus, the government will support small and medium-sized businesses and employers to cope with the extra costs of paying COVID-19 related SSP. In particular, eligible businesses will be able to obtain a refund of eligible SSP costs. The eligibility criteria for the scheme are as follows:
- this refund will be limited to two weeks per employee;
- employers with fewer than 250 employees (as of 28 February 2020) will be eligible;
- employers will be able to reclaim expenditure for any employee who has claimed SSP (according to the new eligibility criteria) as a result of COVID-19;
- employers should maintain records of staff absences, but should not require employees to provide a GP fit note;
- the eligible period for the scheme will commence from the day on which the regulations extending SSP to self-isolators come into force.
The current system does not allow for employer refunds for SSP, so there will be urgent work to set up a refund mechanism for employers as soon as possible. The Chartered Institute of Taxation commented on this in a press release.
The Chancellor also announced enhanced support for businesses and self-employed individuals who have tax payments due but are suffering cash flow difficulties. HMRC have set up a dedicated COVID-19 helpline (0800 0159 559), and are urging anyone worried about meeting their tax bills to call them to discuss the options available, which will include considering a bespoke Time to Pay arrangement so that amounts can be paid off over a period of time, and possible suspension of any ongoing debt recovery action. The use of tailored arrangements will give a business the time it needs to pay HMRC to support their recovery while operating through any temporary financial challenges that occur. HMRC have made a further 2,000 experienced call handlers available to support firms when needed. In addition, HMRC should waive (not charge) late payment penalties and interest where a business experiences administrative difficulties in contacting HMRC or paying taxes when due, as a result of COVID-19.
As with all tax matters, we suggest you keep information where possible about how COVID-19 is affecting your business. For example, if certain members of staff are ill which means you struggle to complete and submit a tax return on time, you might be able to argue you have a reasonable excuse or that there are special circumstances to be considered if HMRC seek to charge you a penalty. It is therefore helpful to have evidence to support an appeal against such a penalty.
There were no announcements in relation to the personal allowance and the UK higher rate threshold. This means that the personal allowance will be frozen at £12,500 for 2020/21; likewise, the UK higher rate threshold will remain frozen at £50,000. That threshold also applies to Welsh taxpayers in respect of their non-savings and non-dividend income. The Scottish higher rate threshold in respect of non-savings and non-dividend income for 2020/21 is frozen at £43,430. The UK rates and bands apply to the savings and dividend income of Scottish and Welsh taxpayers.
Some of the other limits and allowances have changed, however. For example, the blind person’s allowance will increase to £2,500 from 6 April 2020. There will be more details on the rates, bands and allowances for 2020/21 on the LITRG website after 6 April 2020. In the meantime, the full details from the Budget can be found on GOV.UK (see Annex A).
There was confirmation of the government’s commitment to increase the primary threshold for Class 1 and the lower profits limit for Class 4 National Insurance contributions (NIC) to £9,500 from April 2020 (it was £8,632 in 2019/20). This means that employees will only pay NIC on employment earnings of more than £9,500 per year (£792 per month / £183 per week) and self-employed individuals will only pay Class 4 NIC on taxable profits that exceed £9,500 for 2020/21.
As the lower learnings limit for Class 1 NIC only increases to £6,240 per year (from £6,136), those on income above that level will continue to receive Class 1 NIC credits.
As we noted in our press release, individuals on certain benefits may not see the full gain from this change. Individuals who claim no benefits and tax credit claimants who have income above £8,632 should see the full benefit of the increase in the NIC threshold – making them £104 a year better off if they are employees, and £78 a year better off if they are self-employed.
However, those with incomes above £8,632 who are receiving universal credit will most likely see a reduction in their benefit, partially offsetting the gain. This is because universal credit, like other means tested benefits, is based on net income (after tax and NIC have been deducted). As the amount of NIC they pay reduces, their universal credit award also reduces. Instead of gaining £104 a year from the increased NIC threshold, an employee will only gain overall by £38.48 as their UC will be reduced by £65.52. In other words, they only gain 37% of the benefit of any increase in the NIC threshold.
There were a couple of welcome universal credit (UC) announcements, but these related to future tax years rather than 2020/21.
From October 2021, there will be an increase in the repayment period for UC advances to 24 months. The maximum rate at which deductions can be made from a UC award will also reduce at that time, from 30% to 25% of the standard allowance.
There was also confirmation of funding for a delay to the reduction of the UC surplus earnings threshold, so that only large income spikes above £2,500 will be taken into account. The threshold will be reduced to £300 in April 2021, however.
In addition, there was welcome confirmation of funding for an operational change to ensure claimants do not experience a gap in their benefit entitlement when moving from UC to pension credit.
In a similar vein, the government confirmed that there will be funding for increasing the rate of transitional payments for claimants in receipt of severe disability premium when they move to universal credit, but details are not yet available.
Finally, there was confirmation that it is now expected that the full move from legacy benefits to UC will be complete by September 2024.
Tax-Free Childcare (TFC)
There is to be a service improvement that will make TFC compatible with school payment agents. This will allow parents of up to 500,000 school-aged children across the UK to access TFC and use it towards the cost of their wraparound childcare. School payment agents are online payment systems that many schools use in order to receive payment for school meals, for example.
Currently, certain individuals living and working in the UK can obtain child benefit in respect of dependent children who live overseas. The Chancellor announced that EEA migrants arriving in the UK under the new immigration system from January 2021, will not be able to claim child benefit in respect of children living overseas.
Child benefit, along with a number of other benefits, has been uprated for 2020/21. For the eldest or only child it will be £21.05 a week (currently £20.70), and for other children it will be £13.95 a week (currently £13.70).
Alongside the Budget, the government has published its remit to the Low Pay Commission (LPC) for 2020. Confirming the government’s ambitious target, the remit asks the LPC to make recommendations with a view to reaching a National Living Wage (NLW) of two-thirds of median earnings by 2024, provided economic conditions allow. Following recommendations made by the LPC, the NLW will apply to workers aged 23 and over in April 2021, with a target for it to apply to workers aged 21 and over by 2024.
We have welcomed these changes, but cautioned the government to be on the look-out for false self-employment as a consequence in a press release.
The minimum wage rates that will apply from 1 April 2020 are:
- National Living Wage (NLW): £8.72
- 21-24 Year Old Rate: £8.20
- 18-20 Year Old Rate: £6.45
- 16-17 Year Old Rate: £4.55
- Apprentice Rate: £4.15
- Accommodation Offset: £8.20
The government will increase the maximum flat rate income tax deduction available to employees to cover additional household expenses from £4 per week to £6 per week where they work at home under homeworking arrangements. This will take effect from 6 April 2020.
The reform of the off-payroll working rules in the private and third sectors will be legislated for in Finance Bill 2020 and implemented on 6 April 2020, as previously announced. However, the government has recently concluded a review of the reform, and is making a number of changes to support its smooth and successful implementation, including:
- Taxpayers will not have to pay penalties for errors relating to off-payroll in the first year, except in cases of deliberate non-compliance;
- HMRC are confirming their previous commitment that information resulting from changes to the rules will not be used to open new investigations into Personal Service Companies for tax years prior to 6 April 2020, unless there is reason to suspect fraud or criminal behaviour;
- In response to feedback from the roundtables that an immediate change would be beneficial, the Government has already announced that the rules will only apply to services carried out from 6 April 2020 onwards;
- The government will place a legal obligation on clients to respond to a request for information about their size from the agency or worker, and update the legislation to address concerns raised over the rules as they apply to offshore companies.
We continue to raise our concerns that lower paid workers will be driven into using other types of arrangements (some of which we set out in a recent news item) at every opportunity.
The Budget confirmed the government’s response to Sir Amyas Morse’s Independent Loan Charge Review. The changes will be legislated for in the forthcoming Finance Bill. To implement the changes, the government will provide HMRC with additional operational funding.
However, so-called ‘disguised remuneration’ schemes continue to be used (where the scheme designers aim to find ways of making what should be treated as wages as something else, so that it is not taxed). Indeed, the fact there are still 8,000 people in loan arrangements, 3,000 of which are new users, was highlighted by Sir Amyas Morse in his review. In the Budget, the government announced it will shortly issue a call for evidence on further action to stamp out these schemes. We welcome this and indeed this is something that we called for in a recent press release.
The government will increase the Employment Allowance from £3,000 to £4,000 from April 2020. The government say that this will benefit around 510,000 businesses by reducing their costs of employment, with an average gain of £850 per year. The increase will take around 65,000 businesses out of paying NIC entirely and means the government will have doubled the value of the Employment Allowance in four years.
The Employment Allowance will operate as de minimis state aid, so the allowance figure will contribute to the maximum amount of state aid that a company can receive. The increase to Employment Allowance from £3,000 to £4,000 will mean that more businesses are more likely to breach the de minimis state aid ceiling when considering £4,000 instead of £3,000.
To support the employment of veterans, the government is meeting the commitment to introduce a National Insurance holiday for employers of veterans in their first year of civilian employment. A full digital service will be available to employers from April 2022; however, transitional arrangements will be in place in the 2021/22 tax year, which will effectively enable employers of veterans to claim this holiday from April 2021. The holiday will exempt employers from any NIC liability on the veteran’s salary up to the Upper Earnings Limit (£50,000 for 2020/21). The government will consult on the design of this relief.
The government will extend the scope of non-taxable counselling services to include related medical treatment, such as cognitive behavioural therapy, when provided to an employee as part of an employer’s welfare counselling services. The changes will take effect from April 2020.
It was announced in the 2018 Budget that there would be no uplift in the VAT registration threshold for a further two years, and so this means the threshold will remain at taxable turnover of £85,000 for 2020/21.
As there has been no increase in this threshold since April 2017, in real terms this means more businesses are finding themselves coming within the scope of VAT. Not only will these businesses need to get to grips with how the VAT system works, they will also need to become familiar with Making Tax Digital for VAT, which came in from April 2020.
The Chancellor announced a couple of changes to VAT rates. From 1 December 2020, a zero rate of VAT will apply to e-publications. This means that e-books, e-newspapers, e-magazines and academic e-journals will be subject to the same VAT treatment as their physical counterparts. In addition, from 1 January 2021, the government will use freedom from EU law to enable a zero rate of VAT to be charged on women’s sanitary products.
The band of savings income that is subject to the 0% starting tax rate will remain at its current level of £5,000 for 2020/21.
The adult ISA annual subscription limit for 2020/21 will remain frozen at £20,000.
The annual subscription limit for Junior ISAs and Child Trust Funds will be increased from £4,368 to £9,000 for 2020/21.
The capital gains tax annual exempt amount will increase to £12,300 for individuals and personal representatives and £6,150 for most trustees of a settlement from 6 April 2020.
There was confirmation in the Budget documents that two previously announced significant changes to the capital gains tax rules that come into play when an individual sells their home will go ahead.
One of the changes is to letting relief. Until now, this has been available to anyone who lets out a property that has previously been their home and can exempt gains up to £40,000 from capital gains tax. For disposals on or after 6 April 2020, lettings relief will no longer be available to anyone who lets out their home unless they live there along with the tenant – even for periods prior to 6 April 2020.
Moreover, the final period exemption will be reduced from 18 months to 9 months, also with effect from 6 April 2020. There will be no changes to the 36 months final period exemption available to disabled people or those in a care home.
Though not relevant to the Budget, as the law was finalised last year, it is also worth remembering that new capital gains tax reporting requirements for disposals of residential property also come in from 6 April 2020. See GOV.UK for more information.
The government will legislate in Finance Bill 2020 to clarify the income tax treatment of three new Scottish social security payments. The legislation will confirm that the following three benefits introduced by the Scottish government are exempt from income tax: Job Start; Disability Assistance for Children and Young People; and, the Scottish Child Payment. The legislation also includes a new power that enables the government to confirm by secondary legislation when new social security benefits introduced by the UK government or any of the devolved administrations will be tax exempt. The changes will take effect from April 2020.
The Finance Bill 2020 will introduce income tax, inheritance tax and capital gains tax exemptions for payments made on or after May 2020 under the Troubles Permanent Disablement Payment Scheme.
As announced in April 2019, the Finance Bill 2020 will introduce exemptions from income tax, inheritance tax and capital gains tax for payments made on or after 3 April 2019 under the Windrush Compensation Scheme. The legislation also includes a new power to exempt any necessary future compensation payments by statutory instrument from income tax, inheritance tax and capital gains tax, where appropriate.
The Finance Bill 2020 will also introduce an income tax exemption for the bursary paid by the Education and Skills Funding Agency to care leavers aged 16 to 24 who start an apprenticeship. Corresponding legislation will be introduced to mirror the income tax exemption for NIC. This legislation will confirm HMRC’s current position that care leavers’ bursaries are exempt from income tax, including those paid prior to the 2020/21 tax year.
Following consultation, the government will legislate in Finance Bill 2020‑21 to make the renewal of licences to drive taxis and private hire vehicles (PHVs, e.g. minicabs), operate PHV firms, and deal in scrap metal conditional on applicants completing checks that confirm they are appropriately registered for tax. The government say that this measure will make it more difficult for non-compliant traders to operate in the hidden economy and help level the playing field for compliant businesses. However, in our consultation submission [MM20] on this issue we highlighted that the scheme will not affect those who operate illegally without a licence or ensure that those who are registered are actually compliant.
These changes will take effect in England and Wales in April 2022. The government is considering extending the scope of the reform to Scotland and Northern Ireland and will work with the devolved administrations to this effect.
The government will also publish a discussion document to seek views on the wider application of tax conditionality in the spring. This is a principle whereby businesses are granted access to government awards and authorisations (such as approvals, licences, grants) only if they are able to demonstrate good tax compliance.
There were not many significant tax-raising measures in the Budget. However, the Chancellor announced that there would be a greater focus on HMRC tackling various forms of non-compliance.
In order to support this, the government is investing in additional compliance officers and new technology for HMRC. The hope is that this investment will bring in £4.4 billion of additional tax revenue up to 2024/25 by enabling HMRC to reduce the tax gap through additional compliance activity and expanding debt collection capabilities.
As announced on 31 October 2019, the government will legislate to confirm that HMRC may use automated processes to issue taxpayers with notices to file tax returns and penalty notices. This measure will apply prospectively and retrospectively to put beyond doubt that the rules work as designed and intended. The government say that this does not create any new or additional obligations or liabilities for taxpayers.
Tax avoidance and tax advice
As part of the increased compliance activity, HMRC will be given additional powers to ensure the government can take action against those who promote and market tax avoidance schemes. This follows concerns raised in relation to the pursuit of individuals caught up by the loan charge, where it was felt HMRC should also be pursuing the promoters of schemes to disguise remuneration, not just the individuals who used them. The measures will take effect following Royal Assent to the legislation. The measures:
- ensure that HMRC will be able to obtain information about the enabling of abusive schemes as soon as they are identified by strengthening their information powers;
- ensure enabler penalties are felt without delay for multi-user schemes, meaning anyone enabling tax avoidance arrangements that are later defeated will face a penalty of 100% of the fees they earn;
- enable HMRC to act promptly where promoters fail to provide information on their avoidance schemes;
- equip HMRC to act more effectively to stop promoters from marketing and selling avoidance schemes as early as possible;
- ensure promoters fulfil their obligations under the Promoters of Tax Avoidance Scheme (POTAS) regime, including where they have tried to abuse corporate structures to get around the rules;
- make further technical amendments to the POTAS regime, including preventing spurious legal challenges from disrupting the process of scrutinising promoters, so the regime can continue to operate effectively;
- make additional changes to the General Anti-Abuse Rule (GAAR) so it can be used as intended to tackle avoidance using partnership structures.
In addition, HMRC will publish a new strategy for tackling the promoters of tax avoidance schemes. This will outline the range of policy, operational and communications interventions both underway and in development to drive those who promote tax avoidance schemes out of the market, disrupt the supply chain to stop the spread of marketed tax avoidance, and deter taxpayers from taking up the schemes.
Furthermore, the government will publish a call for evidence in the spring on raising standards for tax advice. This will seek evidence about providers of tax advice, current standards upheld by tax advisers, and the effectiveness of the government’s efforts to support those standards, in order to give taxpayers more assurance that the advice they are receiving is reliable.
The government is to invest an additional £12.5 million in HMRC in 2020/21 to begin work immediately on the implementation of breathing space for people in debt. From early 2021 this will mean that those in problem debt can access a 60-day breathing space, including for debts to HMRC, while they engage with debt advice and work towards a sustainable debt solution.
It remains to be seen how these provisions will work alongside HMRC's existing debt practices, as we raised in our consultation submission.
The Budget included an announcement that, to make it easier for self-employed people to navigate the tax system, the government will launch new interactive online guidance for taxpayers with non-Pay As You Earn income this summer. LITRG has noted that online tools can be helpful, provided they are implemented wisely and supplement, rather than replace, existing guidance.
In addition, the government indicated that it will:
- explore how to improve the guidance available for self-employed people applying for a mortgage; and
- consider how to provide appropriate support to self-employed parents so that they can continue to run their businesses, as part of its wider review of Parental Pay and Leave.
LITRG has welcomed the Budget announcement of a call for evidence to review options to address pensions inequality for low-income workers.
As LITRG has noted previously, those earning around or below the level of the personal allowance (£12,500) and saving into a pension scheme under a net pay arrangement are being charged up to 25% more for their pension contributions. This is because they do not benefit from a top-up on their pension savings equivalent to the basic rate of tax. LITRG has previously suggested a possible solution to this problem.
LITRG has also welcomed the announcement that the government will publish an evaluation of the introduction of Making Tax Digital (MTD) for VAT, along with related research. Provided a proper evaluation is made we hope it will ensure all relevant lessons are learned before MTD is rolled out to any other taxes.
LITRG point out that there is still work to be done by HMRC in connection with the MTD for VAT programme, as it is evident that a significant number of businesses have not yet taken the necessary action to comply with the new regime by either signing up for MTD for VAT or claiming exemption. As many of these will be unrepresented, this needs to be addressed by HMRC so that MTD for VAT is working as it should before MTD progresses any further.