Income tax and NICs

Income tax rates and allowances

No changes were announced to the income tax rates so that the basic rate of income tax for 2020/2021 will remain at 20%, the higher rate at 40% and the top (or additional) rate of income tax at 45% for English, Welsh and Northern Irish taxpayers (different rates apply to Scottish taxpayers).

Equally, the main personal allowances were also frozen remaining at £12,500 for those aged under 65, whilst the higher rate threshold will remain at £50,000 in 2020/2021.

See our table of the main tax rates and allowances for 2020/2021.

National insurance contributions

No changes to the rates of national insurance contributions were announced for 2020/21. However, in line with the Conservative Manifesto pledge, the 2020 Budget announced the increase in the NICs threshold from £8,632 to £9,500 from April 2020. Ultimately, the ambition is to raise the threshold to £12,500, in line with the income tax personal allowance.

Employment allowance

The Budget announced that the maximum Employment Allowance will increase by £1,000 to £4,000 from April 2020. This means eligible businesses and charities will be able to claim a greater reduction on their employer Class 1 NICs liability.

The Employment Allowance was introduced in 2014 at a level of £2,000. It is being reformed from April 2020 so that only employers whose NICs liability in the previous tax year was under £100,000 are eligible. The new measure will support those eligible businesses by providing relief of up to £4,000 on their employer Class 1 NICs liability.

Loan charge

Budget 2020 implements the majority of the Morse Review’s recommended changes to the Loan Charge.

The Loan Charge was announced in Budget 2016 as a means to bring historic disguised remuneration into tax. It operated on a long-running avoidance scheme where, rather than paying a salary upon which income tax and NICs were payable, employers paid an employee benefit trust that made limited-recourse loans to taxpayers. The Loan Charge charges the outstanding balance to income tax in the 2019/20 tax year. There was a political backlash – campaigners objected to the fact that HMRC was able to impose the Loan Charge even where they had not opened enquiries into taxpayers’ returns, and the amount charged was often considerable. So in September 2019 the Government commissioned Sir Amyas Morse, formerly the Comptroller and Auditor General of the National Audit Office, to conduct an independent review of the Loan Charge. Sir Amyas presented his report, and the Government responded, in December 2019. Changes following Sir Amyas’s report include that:

• the Loan Charge has been restricted in scope, applying only to the outstanding balance on loans made between 9 December 2010 and 5 April 2019;
• where taxpayers made a “reasonable disclosure” of loans taken out before the 2015/16 tax year and HMRC failed to take protective action, the Loan Charge will not apply; and
• taxpayers can elect to split their loan balance over the 2018/19, 2019/20 and 2020/21 tax years (particularly beneficial to lower rate taxpayers with relatively modest balances, as this could well reduce the rate, and therefore the overall amount, of the Loan Charge they are liable to pay).

Where taxpayers have made voluntary payments to HMRC that would now not be liable to the Loan Charge, they are expected to be eligible for refunds. (Where an employer has made those payments on an employee’s behalf, the employer will be eligible for the refund.)

The changes look likely to place a significant administrative burden on businesses, as, for taxpayers on PAYE, the interface between HMRC and the taxpayer will be their employer. Payroll departments will need to understand the changes. Employers will need to present their employees’ claims for refunds to HMRC and, if successful, account to the employee for the refunded tax, and may need to make changes to RTI returns already submitted to reflect their employees’ decision to spread their Loan Charge balance over three tax years.

Tax treatment of welfare counselling

The Government has announced that it 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 change will take effect from April 2020.

Flat rate deduction for homeworking

In the UK, there is a small exemption for an employer contribution to homeworking costs (generally up to £4 per week). The Budget announced that this exemption will be increased to £6 per week with effect from April 2020.