Budget 2021 – The big freeze
We are back to spring Budgets despite Hammond’s wish that it would move to autumn. I only mention this as today’s was a Budget that is just coming out of winter and there are freezing temperatures throughout it; Inheritance Tax (IHT) thresholds frozen, Lifetime Allowance frozen and, after a small increase in April, some Income Tax allowances will be frozen until 2026.
The frost hits some parts of businesses as well with the rate holiday continuing. But perhaps the Chancellor sees some good weather ahead by thawing corporation tax levels, which are increasing to 25% for larger businesses from 2023.
Capital Gains Tax (CGT) allowances remain unchanged, as well as pension tax relief and tax-free cash. But overall, how will today’s announcements impact your personal finances?
Although sticking to their manifesto pledge that Income Tax, VAT and National Insurance will not increase, freezing your tax-free personal allowance at £12,570 for 4 years is being described as a stealth tax. Effectively, as average wages increase over time, less of your income will be tax-free.
Similarly, the standard Lifetime Allowance will remain at its current level of £1,073,100, instead of increasing every year in line with inflation. This means that once you withdraw more than the allowance from your pension, you will be taxed at 25% or 55% on the excess, depending on whether the withdrawals are taken as income or a lump sum.
Maybe a nice problem to have, a pension worth over £1m, but for those in a Final Salary Pension Scheme (most commonly those in the public sector), having a pension pot valued at £1,073,100 in Lifetime Allowance terms is an annual pension income of £53,655 per year. Therefore, the high earning doctors who have already battled with pension legislation regarding payments into their NHS pension (the tapered annual allowance), are likely to be impacted when they draw from their pension as well.
There were calls for wholesale changes to IHT legislation, which seem to have been put on ice for now. However, as the IHT-free ‘nil-rate band’ (£325,000) and ‘residence nil rate band’ (£175,000) will not benefit from the promised annual inflation uplift for the next few years, as asset prices increase, more of your estate may be taxable on death.
We may have come out of a cold harsh winter economically, hence the freezing temperatures. But this is a Budget that hopes the warm front on the horizon continues its path to the UK.
Tax rules are subject to change and taxation will vary depending on individual circumstances. Please consult a financial professional before making any investment decisions.