Borrowing levels are at an all-time high at 16.9% of GDP for 2020/21. Like many other economies, the UK is clearing up the aftermath of the Covid-19 pandemic. Unprecedented times call for drastic measures. To shield the economy and recoup some of the national debt, Chancellor Rishi Sunak announced that various allowances would remain at their 2021/22 levels until April 2026.
Increasing from £12,500 to £12,570 for 2021/22, the personal allowance has had an inflationary increase. This will be the last of the increases for several years due to the freeze on tax allowances until 2026. As incomes rise with inflation, those who don’t pay tax may start to pay tax once their income rises above the £12,570 threshold.
INCOME TAX RATES AND BANDS
For basic rate tax payers, the band has increased to £37,700 for 2021/22. Those who receive their personal allowance of £12,570, will start paying higher rate tax once they exceed earnings of £50,270. Like the personal tax allowance, this figure will remain the same for the coming tax years up to and including 2025/26.
Both basic rate and higher rate thresholds will remain the same until April 2026. As the incomes rise in line with inflation, more people will pay tax at higher and additional rates. For those who have taxable income of £150,000 and above, they will pay additional rate tax of 45%.
CAPITAL GAINS TAX ANNUAL EXEMPT AMOUNT
There has been no change to the Capital Gains Tax annual exempt amount. This remains at £12,300 for 2021/22 and will remain the same until April 2026.
There are no expected changes currently set, but the Government have made no secrets that a review and potential changes are coming for Capital Gains Tax in general.
NATIONAL INSURANCE BANDS
There have been some changes with regards to National Insurance thresholds. Both Class 1 and the upper profits limit for Class 4 have now been brought into line with the rate at which higher rate tax becomes payable. The thresholds are set at £50,270 for 2021/22. Remaining unchanged until April 2026, the Class 1 threshold will be equivalent to £967 per week and £4,189 per month.
There may be some reviews on other National Insurance thresholds in the future.
Inheritance tax has been topical for some years. Since 2008/09 the nil rate band has been frozen at £325,000. This remains unchanged up to and including 2925/26. Freezing the threshold brings more estates inside the scope of inheritance tax.
With regards to the residence nil rate band (RNRB), this remains at the current level of £175,000 for 2021/22. Spotting the trend here, this too will remain at this level up to an including 2025/26. Where the value of the estate exceeds £2 million or above, the RNRB is reduced by £1 for every £2.
PENSION LIFETIME ALLOWANCE
The pension lifetime allowance places a limit on the value of tax relief a person can have when paying into their pension. When a person has exceeded the pension lifetime allowance, they pay tax in the form of a 25% tax charge if the money is taken as a pension. If they take the excess as a lump sum, they will be subjected to a 55% tax charge.
For 2021/22 and onwards until April 2026, the limit for the lifetime allowance remains at £1,073,100. This will affect anybody with pension savings at this limit or close to this limit, making further pension contributions subject to tax relief during 2021 and onwards limited.
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