Businesses and individuals alike watched with bated breath to hear what Chancellor Rishi Sunak would announce to a) assist with the UK’s recovery and b) to reign in the ever-increasing debt as a result of the Government’s response to Covid-19 pandemic. Whilst I will not comment on the appropriateness of the announcements made in the Budget – I will leave that to you readers – I thought that I would outline what the key tax rates, bands and allowances will be for 2021/22.
In respect of what you will be able to contribute into Individual Saving Accounts (ISAs) from 6th April 2021, the main allowances are unchanged:
- ISA Subscription Allowance: £20,000 per individual
- Junior ISA Subscription Allowance: £9,000 per child
As a reminder, you can subscribe to one Cash ISA, Stocks and Shares ISA, Innovative Finance ISA, and a Lifetime ISA during the tax year (as well as a Help to Buy ISA if this was set up before 30 November 2019), providing that the overall aggregate subscription does not exceed £20,000.
The Dividend Allowance will similarly remain at £2,000 for 2021/22, with any dividends in excess of this taxed at 7.5%, 32.5% or 38.1% respectively depending on your marginal rate of tax.
Despite speculation that there would be big changes to the Capital Gains Tax regime, the Annual Exempt Allowance will remain at £12,300 for 2021/22, with this frozen until 2026. This means that the first £12,300 of capital gains realised in the tax year will be exempt from taxation. Any gains realised in excess of the exempt allowance will be taxable at a rate of 10% for a basic rate taxpayer and 20% for a higher rate/additional rate taxpayer – although as a reminder, the rates are different for gains made on the sale of residential properties (i.e. Buy-2-Lets), with these rates remaining at 18% and 28% respectively.
This will also mean that for many Trusts, the Capital Gains Tax Annual Exempt Allowance will remain at a maximum of £6,150, equivalent to 50% of the individual allowance.
- Lifetime Allowance (LTA): £1,073,100
The Chancellor froze the ‘Lifetime Allowance’ at £1,073,100 until April 2026, capping the amount that individuals can benefit from their pensions before incurring additional tax charges. There have been many adjustments to this allowance over the years, with this most recently increasing by inflation (CPI) on an annual basis since it was reduced to £1m.
Should your pension benefits exceed this cap, then the excess will be taxed at 25% or 55% depending on whether this is taken as income or a lump sum payment. By simply removing this indexation to inflation, the Treasury estimates that they will receive a further £990 million in future tax revenues.
The ‘Annual Allowance’ and ‘Money Purchase Annual Allowance’ will remain as they are, including the tapering of the former should your income exceed certain threshold limits. Speculation had been rife that tax relief could be removed for higher rate taxpayers, or even a flat rate used moving forward, but this has remain unchanged – for now at least.
Whilst pensions normally fall outside of your estate for Inheritance Tax purposes, your investments will be included to determine if Inheritance Tax is payable in the event of death. There had been speculation that the Chancellor might change the current Inheritance Tax regime both in response to the Office of Tax Simplification’s Inheritance Tax recommendations, released in 2019, and as a way to directly increase tax revenue.
Instead, Mr Sunak announced that both the ‘Nil Rate Band’ and ‘Residence Nil Rate Band’ will be frozen at £325,000 and £175,000 respectively until April 2026, with the taper threshold in respect of the latter remaining at £2m. If your estate falls below these thresholds, then there is normally no IHT to pay.
These bands were meant to rise by inflation from April, especially as the Nil Rate Band has been frozen since 2009(!), and by freezing these rates the Treasury forecasts that this will increase IHT receipts by a further £985 million over the next 5 years, based on current IHT receipt trends.
It will very much be more of the same for 2021/22 in respect of investments and pension planning. As quoted by BBC’s political editor, Laura Kuenssberg, this year’s Budget was a “give and take” budget.
The Government is however set to announce a series of tax consultations on 23rd March (“Tax Day”) which may begin to reveal their longer-term plans to balance the books after the unprecedented spending required to deal with the Covid pandemic. It could be that allowances such as Capital Gains Tax have only had a very temporary reprieve. The question to be asked, therefore, is what other changes the Chancellor may be considering, or consulting on, to be implemented over the next couple of years should the UK’s economy pick up after lockdown restrictions are lifted for good?
Please note, until passed into legislation, all the above may potentially be subject to change.
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