How will the Budget 2021 affect your finances?
On 3rd March, Rishi Sunak presented the Budget. This set out the Government’s plans for spending and taxes, following what can only be described as a very expensive year!
The backdrop to the budget is an economy that shrank by nearly 10% in 2020, the biggest drop in GDP for over 300 years. To keep the economy from collapsing, the Government handed out more than £400 billion in free money, the largest peacetime support package on record.
So when Rishi Sunak stood up to the dispatch box, many nervous eyes waited. It was inevitable that taxes would rise, the only question being which taxes and by how much?
The Budget’s invisible tax increase
But to the surprise and delight of many, taxes did not rise, at least not for individuals. If you were a 40% taxpayer before, chances are you’re still a 40% taxpayer now. On the surface, not much seemed to have changed.
But, a closer look at the detail reveals a different picture. By sleight of hand, the Government will increase how much tax we pay, without necessarily increasing our tax rate. It does this by freezing our tax allowances, the amount we can earn, save and invest before we pay tax.
In normal times, our tax allowances increase each year. This offsets the general increase in earnings, spending, asset values etc. As a result, we don’t pay any more or less tax.
By freezing our tax allowance, many of us will unwittingly fall into a higher tax bracket over time. We may also get stung by pension tax charges, investment tax charges and inheritance tax charges.
The below summarises the main changes, and perhaps more importantly, what’s not changing.
The Budget did not change the main income tax rates. They will remain at 0%, 20%, 40% and 45% respectively:
0% – the personal allowance (the amount you earn tax-free) will rise from £12,500 to £12,570 in April 2021. However, there will be no further increases until April 2026.
20% – the basic rate tax band (the amount you pay tax at 20% on) will rise from £50,000 to £50,270 in April 2021. However, there will be no further increases until April 2026.
40% – the higher rate tax band (the amount you pay tax at 40% on) will be from £50,270 to £150,000.
45% – the additional rate tax band (the amount you pay tax at 45% on) will remain at £150,000.
By freezing our tax bands, we will collectively be paying an additional £8 billion per year in taxes by 2026.
If you want to reduce how much you pay in tax, read this article on how to save tax with pensions.
The adult ISA allowance will remain unchanged at £20,000 for 2021/22.
The junior ISA allowance will remain unchanged at £9,000 for 2021/22.
The amount you can pay into your pension remains at £40,000 for 2021/22.
This remains unchanged since 2014/15 (the Government knows that pensions are a good deal and wants to limit the amount you can put in).
Tapered annual allowance
The amount you can earn before your pension allowance reduces remains at £240,000 for 2021/22.
If you earn above £240,000, be careful! Chances are that you will face an unexpected tax bill.
For more information, check out this article on the pension tapered annual allowance.
Pension lifetime allowance
The lifetime allowance will be maintained at the current level of £1,073,100 until April 2026.
The Government expects to raise £300 million per year from lifetime allowance charges by 2026. If the value of your pension is likely to exceed £1m by retirement, plan ahead.
For more information, check out this article on the pension lifetime allowance.
The inheritance tax threshold will be maintained at the existing level of £325,000 until April 2026. Similarly, the ‘residence nil rate band’ (the additional property value you can pass on tax-free) will remain at £175,000 until April 2026.
For many people, this will result in an unexpected inheritance tax liability, as the value of their property/estate is likely to grow over time. The Government expects to collect an additional £445 million per year by 2026.
Capital gains tax
The capital gains tax allowance will be maintained at the current level of £12,300 until April 2026. Particularly important for people looking to sell buy to let properties or investments in the years ahead.
I’m surprised that the capital gains tax rate (%) did not change. Expect more tinkering in the years to come!
The rate of corporation tax will increase from 19% in April 2023 to 25% on profits of over £250,000. Ouch!
The rate for small small companies with profits under £50,000 will remain at 19%. Profits between £50,000 and £250,000 will pay a rate of 20% – 24% (exact bandings to be confirmed).
By far and away, the biggest tax raise to come out of the Budget. The Government expects to collect an additional £17 billion per year in corporation taxes by 2026.
If you own a profitable business, now is the time to be thinking about tax-efficient ways to extract cash from the business (aka directors pension contributions).
Stamp duty holiday
The stamp duty holiday on house purchases has been extended for a further three months.
Until 30th June 2021, there is no stamp duty to pay on properties up to £500,000. After that the nil rate band will be set at £250,000 until the end of September, reducing to £125,000 from October.
How can we help?
As independent financial advisers, we can help you save tax by making the most of your reliefs, allowances and exemptions.
If you want to know more about how we can help, simply book in for a no-cost, no-commitment initial consultation.
All the best,
James Mackay, Independent Financial Adviser in Bristol
Financial Advisor Bristol and Pension Advisor Clifton
About us: Frazer James Financial Advisers is a financial advisor, based in Clifton, Bristol. As an independent financial adviser, we’re able to provide independent and unbiased financial advice. We provide independent financial advice, pension advice, investment advice, inheritance tax planning and insurance advice.
If you would like to speak to a Financial Advisor, we offer an Initial Financial Consultation without cost or commitment. Meetings are held either at our offices, by video or by telephone. Our telephone number is 0117 990 2602.
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This article provides information about investing, but not personal advice. If you’re not sure which investments are right for you, please request advice.
Remember that investments can go up and down in value, you may get back less than you put in.