Personal taxes – Keep calm and carry on

Since Budget day 2021 was confirmed, speculation has been rife about future tax increases to help fund the cost of the coronavirus pandemic, with Capital Gains Tax (CGT) stealing most of the headlines. There we sat in our living rooms, with bated breath, and the Chancellor made us wait 30 minutes (with quite the build-up) before confirming no major tax changes for individuals.

The position for each of the key taxes for individuals (Income Tax, National Insurance, Capital Gains Tax, Inheritance Tax) are summarised below. In short, the Chancellor has kept to the “triple tax lock” pledge but also left CGT and Inheritance Tax (IHT) rates unchanged. Some (not all) tax bands are frozen at 2021/22 levels until 2026, as are many of the tax allowances.

The government estimates the changes to Corporation Tax rates will bring in over £47 billion over the next five years, whilst the freezing of Income Tax, CGT and IHT rates and allowances will bring in just over £20 billion. Not a bad result for “copy and paste” legislation.

Income Tax

The Chancellor set the Personal Allowance for 2021/22 at £12,570 and the basic rate band at £37,700 (the latter does not apply to Scottish taxpayers) until 2026. The 0% savings tax band of £5,000 continues for 2021/22 (not fixed) but this is only relevant for individuals who earn less than £17,570.

The 2021/22 rates mean that an individual will have to earn at least £50,270 before they must pay higher rates of tax. It also means that individuals with adjusted net income in excess of £125,140 will lose their personal allowance completely (suffering an effective rate of tax of 60% on £25,140 of income). As wages increase with inflation, more individuals are likely to find themselves in this 60% bracket and, for those with income between £100,000 and £125,140, pension contributions should be considered to save tax of 60%.

The additional rate threshold was noticeably absent from the Budget document which remains at 45% for income in excess of £150,000 (38.1% for dividends). This opens the door for this threshold to be reduced in future budgets. Also absent from the Budget document was the dividend allowance (£2,000), Personal Savings Allowance (£1,000 for basic rate taxpayers and £500 for higher rate taxpayers) which could see them withdrawn in the future.

National Insurance Contributions (NIC)

The earnings thresholds which apply to employed and self-employed earners have risen in line with Consumer Price Index (CPI) and remain fixed until April 2026. For the first time they have been aligned:

Primary Threshold (Employees) and Lower Profits Limit (Self-Employed): £9,568

Upper Earnings Limit (Employees) and Upper Profits Limit (Self-Employed): £50,270.

All other NIC thresholds “will be considered and set at future fiscal events” which includes Class 2 National Insurance (Self Employed) which has been set (but not fixed) at the 2020/21 rate of £3.05 per week.

Capital Gains Tax

Since the Chancellor requested a review of CGT in July 2020, later published by the Office of Tax Simplification (OTS) in November 2020, we have been waiting to see what changes will be made to CGT, with aligning Income Tax and Capital Gains Tax a possibility.  The only mention in the 106-page Budget document of CGT is the maintaining of the annual exempt amount for Capital Gains Tax at £12,300 (£6,150 for trusts). How does this fit with the OTS recommendation? The OTS commented that “it should be reduced if it’s purpose is to ease administration”. It then suggested changes which should be made in conjunction with a reduction to the Annual Exempt Amount which included reforming the chattels exemption. Can we now disregard this part of this report? Perhaps. Is the Chancellor disregarding the report all together or put it on the back burner for now?  We think the latter is more likely.

Inheritance Tax

IHT is another tax which has been the subject of a consultation by the OTS, although this consultation was requested by former Chancellor Philip Hammond and published in July 2019.

There were only six mentions of IHT in the Budget document, all of which confirmed the nil-rate band and residence nil rate band is to remain at £325,000 and £175,000 respectively until April 2026. The residence nil-rate band will continue to taper down at £2 million.

What next?

In a new approach, the government has introduced “consultation day” which falls on 23 March this year to outline future tax strategies.  The government’s website says “this will ensure tax professionals will have a better opportunity to feed into consultations and policy discussions, which will strengthen policy-making.  None of the announcements will require legislation in the next Finance Bill or have an impact on the government’s finances”.

The final sentence provides reassurance of no dramatic tax announcements, but we hope to get further insight of what is on the government’s agenda later this month.

If you would like further advice or support from us regarding how any of this could affect you, please don’t hesitate to contact us.