The chancellor’s Budget in March unveiled a three-part plan to provide ongoing pandemic support, recoup the coronavirus overspend, and build the UK’s future economy.
While few significant tax increases were announced, many allowances and thresholds have been frozen in a bid to rebalance the public purse.
The Budget was followed by “tax day”, announced late last year and expected to herald further tax reforms. In reality, few major announcements were forthcoming.
So, what allowances have changed? Which have frozen? And what reforms might the year still bring?
Keep reading to find out how your tax bill will be made up in 2021/22.
1. The Personal Allowance
The Personal Allowance is the amount you can earn before you pay Income Tax. The Personal Allowance has risen to £12,570, while the threshold for higher-rate taxpayers has risen to £50,270.
The chancellor announced in his Budget that both of these amounts are now frozen until 2026. While you’ll likely see a small rise in your take-home pay this year, the freeze will have larger implications as the economy recovers.
The move will increase the numbers paying Income Tax and push 1.6 million people into the higher tax bracket by 2024, raising around £6 billion.
2. Pension tax relief
Pension tax relief changes have been long-anticipated, but neither the Budget nor “tax day” addressed the issue.
Basic-rate taxpayers will still receive tax relief at 20%. As a higher- or additional-rate taxpayer, you can continue to reclaim tax relief using your self-assessment tax return.
Experts had been predicting a cut to higher- and additional-rate tax relief to the basic rate of tax or a fixed level of 25% or 30%. With tax relief on the government’s radar, future changes can’t be ruled out.
3. Capital Gains Tax (CGT)
The CGT allowance did not rise in April. Instead, the chancellor froze it at its current level of £12,300 until 2026.
As the economy recovers from the pandemic, the value of your investments and second home could increase. If you want to dispose of assets over the next five years this could mean a rise in your tax bill.
Rishi Sunak ordered a review into CGT back in March 2020. The Office of Tax Simplification (OTS) made eleven recommendations as part of its review, including:
- Aligning CGT with Income Tax
- Reducing the CGT Allowance
- Removing the Inheritance Tax (IHT) “uplift” rule.
Neither the Budget nor “tax day” announcements included changes to CGT rates, but at least some of the OTS recommendations could be taken up in the future.
4. Lifetime Allowance (LTA)
The LTA is a limit on the amount you can withdraw from pensions you hold – excluding the State Pension – without becoming liable for an LTA charge.
Sunak used the Budget to freeze the allowance at its current amount of £1,073,100. It had been expected to rise in line with the Consumer Prices Index (CPI).
The freeze will affect those close to the LTA who want to withdraw funds. If your pension exceeds the LTA, you will pay a 55% charge on any excess you take as a lump sum. The charge is 25% on income.
This could save the government money on tax relief, as those close to the limit will stop contributing to their pension, as well as generating Treasury cash through the LTA charge.
By 2025/26, the freeze could raise £990 million.
Speak to us if you think contributions or investment growth could see you approaching the LTA over the next five years.
5. Inheritance Tax (IHT)
In another tax freeze designed to generate revenue, the chancellor froze both the IHT threshold and the “residence nil-rate band” until 2026, at £325,000 and £175,000, respectively.
As the value of assets you hold increases, you could face an IHT liability.
The All-Party Parliamentary Group for Inheritance & Intergenerational Fairness (APPG IIF) had recommended changes to IHT in January 2020 but, once again, “tax day” didn’t bring the expected announcement of IHT reform.
6. Corporation Tax
A change to the rate of tax on business profits was announced, but the change won’t affect your business this year.
From 2023, businesses with profits over £50,000 will see a rise in the 19% rate of Corporation Tax they currently pay. The increase will be on a tiered basis, up to a new maximum of 25% where profits exceed £250,000.
It is anticipated that from 2023, one in ten companies will pay the new maximum rate.
To incentivise investment and boost the UK economy as it looks to recover from the pandemic, the chancellor also announced a “super-deduction”.
As a business owner looking to invest in tangible assets between now and 31 March 2023, you could see a reduction in your tax bill.
The super-deduction allows you to cut your tax bill by up to 25p for every £1 you invest.