With the UK in over £280 billion of debt due to Covid-19, Chancellor Rishi Sunak announced plans to tighten the UK’s purse strings. Budget 2021 saw several allowances and thresholds frozen at their existing levels until 6 April 2026. But how do the changes affect you?

Personal allowance

The next four tax years will see the personal allowance frozen at £12,570. This is a slight increase from the 2020/21 allowance of £12,500.  This will be the last of the increases until 2026.

If adjusted net income exceeds £100,000, the personal allowance is reduced by £1 for every £2. During the next four tax years, if your adjusted net income is over £125,140, you will not receive a personal allowance.

Income tax bands

The Budget 2021 announced an increase to the basic rate band to £37,700 for 2021/22 up from £37,500 for 2020/21. This rate will remain the same until April 2026.

The point at which an individual who is in receipt of their basic personal allowance starts to pay higher rate tax would be £50,270.

National Insurance threshold

Class 1 National Insurance for the upper earnings limit, and Class 4 National Insurance upper profits limit, are aligned with the higher rate tax threshold. Both are set at £50,270 for 2021/22 up to and including 2025/26.

Other National Insurance thresholds and limits will be reviewed at the appropriate time.

Capital Gains Tax annual exempt amount

The trend continues, but this time with no increase. The Capital Gains Tax annual exempt amount remains the same at £12,300 for 2021/22 up to and including 2025/26.

Inheritance Tax nil rate bands

Since 2008/09, the Inheritance Tax nil rate band has remained at £325,000. Although it was due to be reviewed in 2021, there will be no changes this year, or for subsequent tax years up until 2025/26.

If a main residence is left to a direct descendant, the residence nil rate band (RNRB), remains at its 2020/21 level of £175,000 for the next four tax years. If an estate is valued over £2 million, the RNRB is reduced by £1 for every £2 by which value of the state exceeds £2 million. If an estate is worth more than £2.35 million or above, the RNRB is not available.

Pension lifetime allowance

The pension lifetime allowance restricts the amount an individual can build up in their pension from tax relief. The lifetime allowance remains at £1,073,100 until 2025/26.

What is the impact of freezing allowances and thresholds?

Over the next few years, by freezing allowances and thresholds, it will allow the Government to recoup some of the costs from Covid-19. As assets and salaries rise with inflation, more people will pay more tax in the higher rates and more estates will be liable for inheritance tax.

Planning for the future is essential, and getting it right can make a huge financial impact. For example, reviewing the value of your pension fund before you make any further contributions. If the value of the fund exceeds the lifetime allowance, a tax charge will be due on the excess. 25% will be due where the excess is taken as a pension, and 55% where it’s taken as a lump sum. Therefore, you may choose to make different decisions.

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Any questions?

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