The Chancellor of the Exchequer’s budget is always an important event in the political calendar, but this year’s speech to set out the government’s plans on where they plan to generate and spend income was even more highly anticipated than usual.
As the UK begins to emerge from the tightest grips of the Covid-19 pandemic, how Rishi Sunak would plan to support various sectors of the economy out of the pandemic, whilst also looking at ways in which he might generate revenue to reduce further borrowing, was a very fine balance indeed.
There are many headlines from the budget on how the government will support and boost the economic recovery post Covid-19.
For the purposes of this article, these are the main Budget headlines of relevance to financial planning:
Income tax threshold to increase to £12,570 and higher rate threshold to £50,270 next year then frozen until 2026. No changes to dividend allowance, personal savings allowance, starting rate band for savings. ISA subscription limit remains at £20,000 in 2021/22 and the Junior ISA and Child Trust Fund subscription limits remain at £9,000.
Whilst the government has stuck to its triple lock promise of not increasing income tax, national insurance or VAT, the freezing of the income tax threshold and higher rate threshold will, in time, act as a tax increase. This is due to the effect of fiscal drag; where increases in income resulting from inflation will result in taxpayers moving into higher rate tax brackets.
Inheritance tax, lifetime allowance for pensions, annual CGT allowance and the VAT registration threshold also to be frozen until 2026. Inheritance nil rate band frozen at £325,000 and residence nil rate band at £175,000 until April 2026.
Freezing the Lifetime Allowance (LTA) for pensions at its current level of £1,073,100 for 2020/21 rather than increasing in line with inflation is being seen by some as a stealth tax on savers. The LTA had been expected to rise by £5,800 per person in 2021/22 in line with 0.5% Consumer Prices Index. Although the move may not seem to be a significant move at the outset, the number of people that will be affected will increase over time. If the lifetime allowance were to rise alongside inflation, as had been previously outlined, it would increase by a further £88,900 on current levels by the end of the current parliament.
With wages and inflation increasing over time, more workers will find themselves falling into the trap of potentially paying higher tax rates on savings.
Although the triggers higher tax charges, it’s important to remember that this isn’t a ceiling on what can be saved into pensions. Those that may potentially be affected should consult with an adviser as to the costs/benefits of continuing to save into their pension.
The freeze on Capital Gains tax is, however, a welcome move for investors. There had been rumours that CGT would be targeted as an area that the government looked to generate more tax from, yet the £12,300 annual exempt amount and tax rates will remain unchanged.
A Corporation Tax increase to 25% in April 2023 was announced.
Small companies with profits below £50,000 will continue to pay lower corporation tax rate of 19%. There will then be a tapering of rates based on profits, with the new 25% rate of Corporation Tax only applying to larger companies with profits over £250,000.
This is the most significant tax increase announced in the budget and is a reversal on the policy put in place by previous Chancellors.
For company directors, the new small business rate and tapering thereafter may create a further incentive to contribute to pensions.
With total fiscal support measures now racking up to a cost of £407 billion since start of the pandemic to the end of current packages in 2022, and borrowing standing at £355 bn in this tax year, the Chancellor will inevitably be looking for ways to claw back money through tax increases, threshold freezes etc in the future.
To discuss any of the changes and how they may affect your planning, please get in touch with us.