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Key points from the Budget 2021 and how it may affect your finances
Wednesday, 3rd March 2021, saw the Chancellor Rishi Sunak stand up for only his second Budget. And although the Chancellor has been no stranger in announcing large scale support since his first Budget in March 2020, this time he took the opportunity to not only continue his support for those hardest hit by the pandemic, he also announced the first wave of steps to pay back the growing debt mountain that has been created in order to stabilise the economy.
Whilst there were no nasty surprises in the Budget in terms of immediate income tax rises for individuals, the impact of frozen tax allowances will be felt over the next 5 years. Here is a summary of the key points that were announced.
Personal Allowance and Higher Rate Threshold Frozen
The Chancellor has announced that after the personal allowance and higher rate threshold increase to £12,570 and £50,270 respectively in April, there will be no further increases to these allowances until April 2026. The government claim “nobody’s take home pay will be less than it is now” as a result of this change and whilst this may be true in nominal terms, in real terms net incomes will fall if workers or pensioners receive inflationary increases to their incomes but these are not matched by increases in tax allowances.
Capital Gains Tax Unchanged
The annual capital gains tax exemption of £12,300 will also remain frozen. It had been rumoured that capital gains tax rates could be equalised with income tax rates, but this did not materialise.
Lifetime Allowance Frozen
The lifetime allowance (for more information, click here) will also remain at its current level of £1,073,100 until April 2026, rather than increasing in line with inflation as had previously been expected. This is an important change as it could result in many investors reaching their lifetime allowance earlier than expected, with benefits in excess of the lifetime allowance taxed at up to 55%.
Inheritance Tax Nil Rate Bands Frozen
Whilst there were no increases to inheritance tax announced in the budget, inheritance tax nil rate bands will not increase until April 2026 either, so inflationary increases to property prices or investment growth over the next 5 years could push households currently below the thresholds into a position where inheritance tax may be due on death.
Good news for property buyers
As the emergency stamp duty nil-rate band of £500,000 was extended beyond its previous end date of the end of March to 30 June and at this point, it will continue at a lower level of £250,000 until September rather than ending immediately as was previously expected. This will be good news to people currently purchasing properties which may not complete within the next month. The Chancellor also announced a guarantee scheme for mortgages up to £600,000 with a 5% deposit.
Mixed news for businesses
With corporation tax set to rise from 19% to 25% in 2023 for businesses with profits of over £250,000 p.a., but a ‘super-deduction’ was announced which will allow companies to reduce their tax bill by 130% of the cost of any investment in equipment they make over the next 2 years.
In summary, whilst the Chancellor resisted the temptation to increase taxes immediately, freezing tax allowances will result in many people paying more tax over the coming years due to inflationary increases to their income and investment growth. The freezing of the lifetime allowance in particular could result in investors hitting the lifetime allowance (and incurring tax charges of up to 55%) sooner than they were anticipating, so financial plans should be revisited to review the implications of this.
If you’re concerned about how this Budget might affect your financial plans or you simply feel you might benefit from a review of how you can achieve your financial goals, why not get in touch and speak to one of our chartered financial experts.
We’re currently offering anyone with £100,000 or more in savings, investments or pensions a FREE cash flow financial review worth £500. So why not see if we can help.