Page 2 - Budget 2021

05 March 2021

BUDGET NEWSLETTER

THE BUDGET BACKGROUND

It is less than a year since Rishi Sunak presented his first Budget, after having been in the role of
Chancellor for less than a month. His despatch box première featured an allocation of £12bn
towards mitigating the impact of the Covid-19. Ironically, on the same day as Mr Sunak revealed
that boost to spending, the World Health Organisation declared the outbreak a pandemic. Total
expenditure in the U.K. on dealing with the pandemic is now estimated to be around £300bn.

The March 2020 Budget was what should have emerged in the Autumn of the previous year, before being deferred
because of the General Election. The March 2021 Budget is the result of the uncertainties created by the pandemic.
This meant the Chancellor felt it wisest that he waited until Spring 2021 to present the Budget. Since then, Mr Sunak
has been kept busy announcing extensions to the various Covid-19 support schemes introduced in 2020. Whether the
Chancellor feels the economic outlook today is much clearer than six months ago is a moot point.

One financial aspect which has been painfully clear for some time is that the government’s finances have been
fundamentally changed by the pandemic. A year ago, the Office for Budget Responsibility (OBR) forecast that the
government would borrow around £55bn in 2020/21. Twelve months later its estimate has risen to £400bn. The
coming year, 2021/22, should see borrowing more than halve according to the OBR, but the deficit is still projected to
be running at over £160bn – more than three times the figure of just two years ago.

Dealing with this level of borrowing is probably not what Mr Sunak signed up for when he moved into 11 Downing
Street. He now has to deal with total government debt of about £2,100bn, equal to the UK economic output for the
year. The last time debt was as high was in the early 1960s, when the UK was still in the business of paying down the
bills incurred in the World War II.

Despite the lake of red ink, Mr Sunak was never going to introduce significant tax increases in this Budget. For a start,
nearly all economists, regardless of political hue, were saying that economic recovery was the priority and sorting out
the debt could wait. Secondly, Mr Sunak’s boss, Boris Johnson, cannot even bring himself to mention the A-word
(austerity) which would ruin his ‘levelling up’ agenda. As a result the Budget was one of tax pain largely deferred.

The proposals of most interest were:

• The addition of £70 to the personal allowance and £200 increase in the basic rate band, in line with indexation
requirements. However, after 2021/22, the personal allowance and higher rate threshold (outside Scotland) will
be frozen for four tax years.

• The inheritance tax nil rate band, the pensions lifetime allowance and the capital gains tax annual exemption will
all be frozen at their current levels for the next five tax years.
• For companies with profits of over £250,000, in April 2023 the rate of corporation tax will jump by 6 percentage
points to 25%. A new smaller companies’ rate of 19% for companies with profits of up to £50,000 will be
introduced at the same time.

• A new ‘super-deduction’ 130% first year allowance will be introduced for companies investing in plant and
machinery between 1 April 2021 and 31 March 2023.

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