Budget 2021 – impact on personal tax

The UK has suffered the double whammy of BREXIT and the Coronavirus Pandemic, so we awaited the budget in some trepidation. The chancellor needs to stimulate the economy whilst raising sufficient money to start paying the country’s debts which have reached the highest level since the second world war. Below is a basic summary of the changes made and what we may expect in the future.

Income Tax

Personal allowance

The tax-free personal allowance will rise by £70 to £12,570 from 6 April 2021 and will remain at that level until 5 April 2026; 5 tax years.

However, not everyone is entitled to a personal allowance.

Those whose income exceeds £100,000 have their personal allowance eroded by £1 for every £2 income over the £100,000 threshold so those with income of £125,000 in 2020/21 and £125,140 for the years 2021/22 to 2025/26 will not be entitled to a personal allowance.

In addition, non-domiciled UK resident who claim for the remittance basis of taxation forfeit their personal allowance.

Tax Bands

The basic rate threshold will rise from £37,500 to £37,700 from 6 April 2021 and will also be frozen at that level until 5 April 2026. This means that people earning up to £50,000 in 2020/21 and £50,270 for the years 2021/22 to 2025/26 will pay tax at basic rate, currently 20%, on income above their personal allowance.

Those who earn more than that will pay tax at the higher rate of 40% on income from £50,000 2020/21 and £50,270 2021/22 to 2025/26 to £150,000. Income above the unchanged threshold of £150,000 will be taxed at the additional rate of 45%.

Given that the average UK salary for full time workers is £38,600 this should have little impact on tax paid in the 2021/22 tax year for most people. Those who earn around the £50,000 and can reasonably expect to receive a rise by sometime in 2022 will find that the top slice of their income is taxed at 40% rather than 20%. Those who earn over £100,000 and receive rises will find that their personal allowance is eroded and, once they exceed the £150,000 threshold their top slice of income will be taxed at the additional rate of 45%.

It should be noted that tax rates on dividend income are 7.5% basic rate, 32.5% higher rate and 38.1% additional rate. Dividends are normally regarded as the top slice of income.

Pension Contributions

The lifetime allowance for tax free savings into pension schemes has been frozen at £1,073,100 until 2026.  From 6 April 2026 the annual inflation linked increases will resume.  Those who wish to invest more in their pensions can do so but will face tax consequences.  Your pension provider should advise you if you exceed the allowance and tell you how much tax you owe.  They will deduct the tax before the money is paid to you. If you receive a lump sum it will be taxed at 55%, if you receive the pension any other way, such as cash withdrawals or pension payment, the tax rate is 25%.

Capital Gains Tax

The annual exempt amount has been frozen at its current level, £12,300 until 5 April 2026. No changes were made to the rates of tax so gains on residential property will be taxed at 18% or 28% depending on whether the taxpayer has any unused basic rate band available. Gains on other assets will be taxed at 10% or 20% depending on the level of unused basic rate band available.

Inheritance Tax

The nil rate band will remain at £325,000 until 5 April 2026. No change was made to the rates of tax payable.

Treasury report of ‘Tax after Coronavirus’

The Treasury committee published their report on Monday, 2 days before the budget. The report suggested that the current situation, the aftermath of BREXIT and the pandemic, meant that there was a unique opportunity to undertake a comprehensive review of the UK tax system and it particularly suggested a reform of capital taxes – capital gains tax and inheritance tax.

The Office of Tax Simplification has been looking at these two taxes and should publish its findings later this month. It may well be that changes will be made in the next couple of years.

If you have concerns about your tax situation, please contact the Private Wealth team at Child & Child to discuss.

Key Contact

Denise Baugh – Tax & Trust Executive – Private Wealth & Tax

Email: denisebaugh@childandchild.co.uk

Direct Dial: 020 7201 3575