TaxAngles Newsletter- April 2021 Edition
A newsletter for proactive planning...
In this edition...
April 2021 Issue
Personal and family companies – Optimal salary for 2021/22
Take advantage of the enhanced carry back of losses
Super-deduction for capital expenditure
Further grants for the self-employed
Tax allowances frozen until April 2026
My journey in accountancy - Sarah McInnes
10 Questions with.... Compass Accountant's Louise Edwards
Personal and family companies – Optimal salary for 2021/22
A popular profit extraction strategy for shareholders in
personal and family companies is to pay a small salary and to
extract further profits as dividends. The optimal salary will
depend on whether the employment allowance is available to
shelter any employer’s National Insurance liability that may
Preserving pension entitlement
One of the main advantages of paying a small salary is to
ensure that the year remains a qualifying year for state
pension and contributory benefit purposes. To qualify for a
full state pension on retirement, an individual needs 35
For the year to be a qualifying year, earnings must be at least
equal to the lower earnings limit. A director has an annual
earnings limit, and for 2021/22, the annual lower earnings
limit is set at £6,240. Where the shareholder is not a
director, earnings for each earnings period must be at least
equal to the lower earnings limit. For 2021/22, the weekly
and monthly thresholds are, respectively, £120 and £520.
Contributions are payable by the employee at a notional zero
rate on earnings between the lower earnings limit and the
primary thresholds. The employee starts paying
contributions once earnings exceed the primary threshold.
Optimal salary – Employment allowance is not available
The employment allowance is not available to companies
where the sole employee is also a director. This means that
personal companies will generally be unable to claim the
For 2021/22, the primary threshold is set at £9,558 (£184
per week/£797 per month) and the secondary threshold is
set at £8,840 (£170 per week, £737 per month).
Although the maximum salary that can be paid without
paying any National Insurance is one equal to the secondary
threshold of £8,840 for 2021/22, it is beneficial to pay a
higher salary equal to the primary threshold of £9,568.
Employer’s National Insurance will be payable on the salary
to the extent that it exceeds £8,840 at a cost of £100.46
(13.8% (£9,568 - £8,840)), however, this is outweighed by
the corporation tax deduction at 19% on the additional
salary and the employer’s NIC.
Once the primary threshold is reached, employee
contributions are payable at 12%. At this point, the
combined National Insurance cost of 25.8% (13.8% +
12%) is more than the corporation tax saving and
paying a salary in excess of the primary threshold is
Thus, where the employment allowance is not
available, the optimal salary is equal to the primary
threshold for 2021/22 of £9,568 (£184 per week,
£797 per month).
Optimal salary - Employment allowance is
In a family company scenario, the employment
allowance will be available if there is more than one
employee on the payroll. As long as the employment
allowance is available to shelter the employer’s
National Insurance that would otherwise arise, the
optimal salary is one equal to the personal allowance,
set at £12,570 for 2021/22. No National Insurance is
payable until the primary threshold is reached. Above
this level, employee National Insurance is payable at
the rate of 12%. However, the additional salary saves
corporation tax at 19%. However, once the personal
allowance has been used, tax at 20% is payable as well
as employee’s National Insurance of 12%, which
exceed the corporation tax deduction of 19%.
Thus, where the employment allowance is available,
the optimal salary for 2021/22 is one equal to the
personal allowance of £12,570 (£242 per week,
£1,048 per month).
Take advantage of the enhanced carry back of losses
Many businesses have suffered losses as a result of the Covid-19 pandemic, and where a business has made a loss,
various options are available to obtain relief for that loss. The challenge is to make the best use of the loss.
To help loss-making businesses, legislation is to be introduced to increase temporarily the period for which a business
can carry back a loss from one year to three years. The extended carry back is available to both unincorporated business
and companies, and can be used to generate a useful tax repayment at a time when cash flow is tight.
Under the existing rules, a person who incurs a trading loss in a tax year can make a claim to offset the loss of their net
income of the current year, the previous year or both years. This option is now available to traders using the cash basis.
For a limited period, the carry-back period will be extended, and losses can be carried back and set against trading
profits of the previous three years. from one. Losses carried back must be set against the income of a later year before an
earlier year. The extended carry back will apply to losses in 2020/21 and 2021/22. It will enable a loss for 2021/22 to be
carried back where a loss was also made in 2020/21 and the individual had no other income for that year.
Lottie is a beautician. She prepares accounts to 31 March each year. For the year to 31 March 2021, she made a loss of
£12,000. It is assumed that she made a loss of £7,000 for the year to 31 March 2022.
She had trading profits of £27,000 in 2019/20, £20,000 in 2018/19 and £16,000 is 2017/18.
She carries the loss of £12,000 back to 2019/20 reducing her profits to £15,000 for that year and generating a tax
repayment of £2,400 (£12,000 @ 20%).
In the absence of the extended carry back, if she had no other income (or gains) for 2021/22 and no income for 2020/21,
Lottie would have to carry the loss from 2021/22 forward to set against other profits from the same trade.
Cont on pg 4
However, the extended carry-back allows her to
carry the loss back to set against trading profits
of 2019/20. Although, this will reduce her profits
to £10,000, which is below the personal
allowance for that year of £12,500, it will
generate a tax repayment of £500 (£2,500 @
20%), which may be useful.
As the loss cannot be tailored to preserve the
personal allowance, if she does not want to waste
any of her personal allowance for 2019/20, she
can instead carry the 2021/22 loss forward.
The extended carry back also applies for
corporation tax purposes for losses incurred in
accounting periods ending between 1 April 2020
and 31 March 2021 and losses incurred in
periods ending between 1 April 2021 and 31 March 2022. For corporation tax purposes, losses can be carried back
to the preceding accounting period. Where the extended carry-back applies, a loss can be carried back and set
against profits of the same trade for the preceding year and two previous years, with losses being set against a later
year before an earlier year.
ABC Ltd makes a loss of £40,000 for the year to 31 January 2021 and a loss of £25,000 for the year to 31
January 2022. The company made a profit of £30,000 for the year to 31 January 2020, a profit of £50,000
for the year to 31 January 2019 and a profit of £42,000 for the year to 31 January 2018.
The loss for the year to 31 January 2021 is carried back and set against the profit of £30,000 for the year to
31 January 2020, with the remaining £10,000 set against the profit of £50,000 for the year to 31 January
2019, reducing it to £40,000. This generates a corporation tax repayment of £7,600 (£40,000 @ 19%).
The loss of £25,000 for the year to 31 January 2022 is carried
back and set against the remaining profits for the year to 31
January 2019, reducing them to £15,000. This generates a tax
repayment of £5,000 (£25,000 @20%).
Without the extended carry back, it would only have been
possible to carry-back £30,000 of the loss for the year to 31
January 2021, reducing the repayment to £5,700. Using the
extended carry back increases the total repayment by £6,900.
Super-deduction for capital expenditure
To encourage companies to invest, enhanced capital allowances
are available for expenditure incurred within a limited two-year
window. As an alternative to the annual investment allowance
(AIA), companies will be able to benefit from either a superdeduction or a new first-year allowance, depending on whether the
expenditure is on assets that would qualify for main rate capital
allowance or for special rate capital allowances.
The super-deduction will allow companies to claim capital allowances of 130% for expenditure on new assets that
would otherwise qualify for main rate (18%) plant and machinery capital allowances where the expenditure is
incurred in the period from 1 April 2021 to 31 March 2023. The super-deduction does not apply where the contract
for the asset was entered into prior to 3 March 2021 (Budget Day), even if the expenditure is incurred in the
qualifying two-year period. Plant and machinery which is purchased under Hire Purchase or similar contracts must
meet additional conditions in order to qualify for the super-deduction.
Where an accounting period straddles 1 April 2023, the rate of deduction is apportioned based on the number of
days in the accounting period falling before 1 April 2023 and the number of days in the accounting period falling on
or after this date. The effect of the super-deduction is that for every £100 of expenditure on qualifying assets in the
qualifying period, the company can claim capital allowances of £130 when computing taxable profits. This gives an
effective rate of relief of 24.7% (130% x 19%).
Where an asset which has benefited from the super-deduction has been sold, disposal receipts are treated as
balancing charges rather than being taken to pools. A factor of 1.3 is applied to the disposal receipt when calculating
the balancing charge.
Companies wishing to benefit from the super-deduction should plan the timing of investments in qualifying assets so
that the expenditure is incurred in the qualifying two-year period. Where significant investment is planned after 1
April 2023, consideration could be given to accelerating the investment to benefit from the super-deduction.
A company does not have to claim the super-deduction. Where the company is loss-making or profits are low, it may
wish to claim writing down allowances instead or tailor the claim to reduce the profit to nil. Likewise, if the plan is to
sell the asset in a few years, it may be preferable to claim writing down allowances rather than suffer the balancing
charge on the disposal.
New first-year allowance
A new first-year allowance of 50% is available for expenditure on most new plant and machinery that would
otherwise qualify for special rate writing down allowances of 6% where the expenditure is incurred in the period 1
April 2021 to 31 March 2023. As with the super-deduction, it is only available to companies.
This is an alternative to the annual investment allowance, which gives a deduction of 100%. However, the first-year
allowance may be beneficial where the AIA limit has already been reached.
Further grants for the self-employed
The Self-Employment Income Support Scheme (SEISS) has provided
grant support for self-employed individuals whose business has been
adversely affected by the Covid-19 pandemic. An extension to the
scheme was announced at the time of the 2021 Budget. As a result, it
will continue to provide support until September 2021. Three grants
have already been made under the scheme. As a result of the extension,
a further two grants will be available. In addition, individuals who
started trading in 2019/20 may now be eligible to claim.
The fourth grant covers the period from February to April 2021 and is
based on 80% of three months’ average trading profits. The amount of
the grant is capped at £7,500. It is paid out in a single instalment.
To be eligible, the trader must have filed his or her 2019/20 selfassessment tax return and traded in 2020/21. Only traders whose
trading profit is not more than £50,000 in 2019/20 or, where trading profit exceeds this level in 2019/20, not more than
£50,000 on average over the period from 2016/17 to 2019/20 can benefit from the grant. In addition, income from selfemployment must account for at least 50% of the individual’s total income.
To qualify for the grant, the trader must either:
be trading currently but demand has fallen as a result of the impact of the Covid-19 pandemic; or
have been trading but is unable to do so temporarily as a result of the Covid-19 pandemic.
The trader must also declare that:
they intend to continue trading; and
they reasonably believe that there will be a significant reduction in their trading profits due to reduced business
activity, capacity, demand or inability to trade due to Coronavirus.
Claims for the fourth grant can be made online from late April 2021 until 31 May 2021.
The fifth and final grant will cover the period from May to September 2021. The amount of this grant depends on the extent
by which turnover has fallen as a result of the Covid-19 pandemic. Traders who have suffered a reduction in turnover of at
least 30% will be eligible for a grant worth 80% of three months’ average trading profits capped at £7,500. A smaller grant
worth 30% of three months’ average trading profits capped at £2,850 will be available to traders who turnover has fallen as
a result of coronavirus but where the reduction in turnover is less than 30%.
When the SEISS was originally launched, only those traders who had filed their 2018/19 tax return by 23 April 2020 could
claim. As the filing date for the 2019/20 tax return of 31 January 2021 has now passed, individuals who commenced trading
in 2019/20 and who have been adversely affected by the Covid-19 pandemic can claim the fourth and fifth grants under the
scheme provided that they had filed their 2019/20 self-assessment return by midnight on 2 March 2021. They will also
need to meet the other eligibility conditions.
Grants are taxable
Grants received under the SEISS are taxable and must be taken into account in working out the taxable profits for the year
in which the grant is received.
Tax allowances frozen until April 2026
The financial impact of the Covid-19 pandemic is unprecedented and borrowing levels in 2020/21 of 16.9% of
GDP represent the highest level of peacetime borrowing. To meet some of this cost, the Chancellor, Rishi
Sunak, announced in the 2021 Budget that various thresholds and allowances would remain at their 2021/22
levels until April 2026.
The personal allowance is increased to £12,570 for 2021/22 – an inflationary increase of £70 over the
2020/21 level of £12,500. However, the allowance will remain at this level for 2022/23, 2023/24, 2024/25 and
2025/26. As incomes rise with inflation, people who currently do not pay tax may start to pay tax once their
income rises above £12,570.
Income tax rates and bands
The basic rate band is increased to £37,700 for 2021/22. This means that where someone is in receipt of the
personal allowance of £12,570, they will start paying higher rate tax once their income exceeds £50,270. This
remains the case for tax years up to and including 2025/26.
The basic rate band and higher rate threshold will remain at these levels until April 2026. As incomes rise in line
with inflation, more people will pay tax at the higher and the additional rates. Tax is payable at the additional rate of
45% on taxable income in excess of £150,000.
Capital gains tax annual exempt amount
The capital gains tax annual exempt amount remains at £12,300 for 2021/22 and is frozen at this level until April
2026. However, there may be changes to capital gains tax on the horizon as this is something that the Government
are looking at.
The upper earnings limit for Class 1 National Insurance contributions and the upper profits limit for Class 4
contributions are aligned with the rate at which higher rate tax becomes payable. Both are set at £50,270 for
2021/22. For Class 1 purposes, this is equivalent to £967 per week and £4,189 per month. These too will remain
unchanged until April 2026. All other National Insurance thresholds will be reviewed at the appropriate time.
The nil rate band has been frozen at its current level of £325,000 since 2008/09. It will remain at this level up to and
including 2025/26. The freezing of the threshold brings more estates within the ambit of inheritance tax.
The residence nil rate band (RNRB) remains at its 2020/21 level of £175,000 for 2021/22. It too will remain at this
level for the 2023/24 to 2025/26 years inclusive. The RNRB is reduced where the value of the estate is £2 million or
above by £1 for every £2 by which the value of the estate exceeds £2 million.
Pension lifetime allowance
The pension lifetime allowance places a cap on the value of tax relieved pension savings. The tax relief on pension
savings in excess of the lifetime allowance is recovered in the form of a 25% tax charge where the excess is taken as
a pension and a 55% tax charge where the excess is taken as a lump sum. The lifetime allowance remains at
£1,073,100 for 2021/22 and will stay at this level until April 2026. This will limit the ability of anyone with pension
savings at or near this level to make further tax-relieved pension contributions during 2021/22 and the following
four tax years.
My Journey in AccountancySarah McInnes
Sarah McInnes is an Accountant on the Compass team- Here she talks about her journey in accountancy, how
she gained her qualifications, and what it is about her profession that she most enjoys...
I kind of fell into accountancy, I never intended or
desired to be an accountant. I was working as an admin
assistant for the telecoms company in Waterlooville and
fancied a change.
I looked through the newspaper (that’s when job ads
didn’t involve expensive recruitment agents!) and found
a tiny little advert looking for a bookkeeper. My first
thought was ‘I could do that’ when in fact I didn’t actually
know if I could. I went for the job and got it, about 2
years in they asked if I wanted to train as an accountant.
I declined at first but then decided I would try it. I started
training and have never looked back.
Firstly, I got my CAT qualification (Chartered Accounting
Technician), which is a necessary foundation. Many
bookkeepers also get to technician level as it gives you a
good basic knowledge of fundamental accounting terms
This took me about 2 years. I then moved on to ACCA,
ideally, I would have liked to have completed ACA, but the
practice where I worked was an ACCA practice. ACCA was
hard -particularly as I was doing home study. I studied at
home and then just before my exams (which were every
June & December) I took a revision course which was
usually a week in class with other students.
Cont on pg 8
Trying to get motivated to work at home was particularly difficult as I was in my early 20s and wanted to go out
and party! I nearly gave up a few times, especially when I failed my last exam twice but kept going. I qualified in
2009 and obtained my Fellowship in 2015, after 5 years of being a full member. I am therefore, a FCCA. I didn’t pay
to keep my CAT qualification so have dropped those letters.
I found more people qualified as AAT which is the more popular technician level. CAT was not as popular.
Obviously as I have gained more experience my job has evolved. I found things hard at first but had a good support
network where I worked.
I am glad I started working in a small practice and not one of the larger ones as I have managed to do a bit of
everything and this helped my training. In larger firms you would generally do a small part of the work and then
pass on to someone else or a manager but working in a small firm this was not an option. This means I have a vast
experience in most aspects of my work and the work we carry out at Compass.
I love my job now and enjoy helping people, giving advice and when we have trainees, I enjoy teaching them as
much as possible. I love being an accountant and I am proud that I qualified. I particularly enjoy advising clients,
especially when I know the advice I have given will be beneficial to their business.
I am amazed by the amount of people who think I must be good at maths to be an accountant and I relish in telling
them that’s not the case. My Dad taught me mental arithmetic and so I am not too bad at maths, but I wouldn’t be
able to do a maths degree.
If I could give anyone considering accountancy advice, I would say to stick with it, avoid cutting corners, and
remember the basics. Whenever I am stuck I go back to basics. If you can remember the basics, you can do the job
10 Questions with...
We are very pleased to welcome new Accountant, Louise Edwards to the Compass team!
Here are Louise's answers to the Compass '10 Questions with...' feature:
1. What is the first thing you would buy if you won the lottery?
A house for my parents, close to mine!
2. How did you get into accounting?
I had been made redundant from my first job, where I worked within the
accounts department. My naïve self thought -I would take a few months
off, as I had my redundancy pay, but my parents had other ideas! My Mum
saw an advert in the window of a local accountancy firm and made me
apply. I’m so glad I did, I discovered that I love Accountancy and working
3. What is your favourite film?
4. What was your first ever job?
Shop Assistant at Superdrug, only 3 hours a week on a Saturday
afternoon when I was 16.
5. If you could invite anyone (dead or alive) to your dinner party who
would you invite?
My Great Nanny. She passed when I was young, but I still remember her
fondly and would love to spend time with her again.
6. What do you like most about working for Compass Accountants?
Friendly, welcoming colleagues and a happy working environment.
7. Which super power would you most like to have and why?
I’m not sure!!
8. What is your favourite place in the world that you have been?
9. What did you want to be when you were growing up?
A teacher. However now I have home schooled my kids throughout two
school closures, I can honestly say I am glad I did not pursue this!
10. Tell us one strange or unique fact about yourself!
My Mum buys my cousin and I fluffy socks every Christmas, and we
always swap one of them with each other so that we both have the same
pair of odd socks. We then randomly send each other odd sock photos
throughout the year.
6th- Key tax changes come into effect including changes to income tax and National Insurance rates and
22nd- PAYE and NICs for the month or quarter which ended on 5 April, paid to HMRC electronically (19
April if paid by post).
30th- Automatic £100 penalty and additional daily £10 penalties start to be incurred if you have not filed
your self-assessment tax return for year ending 5 April 2020.
For further information on any of the stories in this
month’s newsletter, or for any other matter that Compass
Accountants can assist you with, please contact us on
01329 844145 or firstname.lastname@example.org
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Compass Accountants, Venture House, The Tanneries, East Street, Titchfield Hampshire. PO14 4AR
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