The first of two Budgets in 2021 brings larger tax bills in future years.
Once upon a time, the concept of ‘Budget Purdah’ meant that very little of a Budget’s contents trickled out before the day. Major leaks would prompt serious investigations and demands for resignations. The latest Budget underlined how that principle has been eroded. Despite extensive coverage ahead of 3 March, some rumours proved true, others didn’t materialise and Mr Sunak still had some surprises.
Income tax
The personal allowance will rise to £12,570 and the higher rate threshold will increase to £50,270 for 2021/22. Both will then be frozen for the next four tax years. In Scotland, the higher rate threshold for non-savings, non-dividend income, is set to rise to £43,662 in 2021/22.
Many of the important tax thresholds were once again frozen, such as the £50,000 starting point for the High Income Child Benefit Charge and the £100,000 level at which the personal allowance starts to be tapered away.
Pensions
The lifetime allowance for pension savings, which started out in 2006 at £1,500,000, was frozen at £1,073,100 and will remain at that level until April 2026. No changes were made to the annual allowance. The possibility that the Chancellor will reduce tax relief on pension contributions in his next Budget, due in the autumn, remains a real one.
Capital gains tax
The capital gains tax (CGT) annual exempt amount was also frozen for five tax years at its 2020/21 level of £12,300. The Chancellor made no mention of the report he commissioned last year from the Office for Tax Simplification (OTS) on the reform of CGT which he received in November.
Inheritance tax
After being frozen since 2009, the inheritance tax (IHT) nil rate band was due to benefit from an indexation uplift in 2021/22. It did not happen, and the nil rate band joined the freeze-until-2026 tax group. Had the band been linked to inflation since 2009, it would be about £90,000 higher from 6 April 2021. The residence nil rate band will also remain at its current level (£175,000) until 2026. As with CGT, Mr Sunak also has a report from the OTS on reform of IHT in his inbox.
Corporation tax
As widely rumoured, the rate of corporation tax will increase. However, the rise will not take effect until April 2023, when the main rate will jump by 6% to 25%. At the same time a new small companies’ rate, equal to the current main rate of 19%, will apply to companies with profits of up to £50,000. A marginal taper will apply to companies with profits between £50,000 and £250,000. The changes will reduce the relative tax efficiency of operating a business via a company rather than as a sole trader.
The freezing of so many tax thresholds until 2026 counts as a set of stealth tax increases. It will mean that over time, inflation will drag a growing number of people across tax thresholds, triggering new or higher tax liabilities.
If you need any guidance on how the changes (and many non-changes) announced in the March 2021 Budget could affect you, or advice regarding actions to consider before its autumn sequel, please get in touch with one of our experienced financial planners at FAS here.
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