Set against a backdrop of a shrinking economy and increased state aid following COVID-19 restrictions, no one was expecting a giving budget. But what did we actually get and what could it mean for you? We spoke to our official partner Carpenter Box to find out.
For UK individuals, plenty of things didn’t change.
One of the main headline announcements was an upcoming freeze on personal Income Tax rates, Capital Gains Tax, Inheritance Tax and National Insurance (yes, this is a tax, despite the name). The idea behind this is that someone earning the same will not pay more tax.
Historically, tax allowances and tax bands have increased each year in line with inflation (inflation being the measure of the speed goods and services increase in price). The chancellor announced a freeze on tax bands and allowances starting next year and continuing until 2026. The fact that inflation was low last year was perhaps the reason the Chancellor allowed the April increase to squeeze in an increase before the freeze.
By freezing the personal allowance and higher rate tax bands, the treasury can use inflation to dig its way out of debt. This works by effectively freezing the lower rates of tax available whilst people’s expenses and earnings are expected to increase, moving more of the country’s earnings into higher rates of tax.
What does this mean for you?
The impact of inflation is slow, so you may not notice much immediately. For example, imagine we have inflation of around 2 – 2.5 per cent per annum for the next few years. A person earning £50,000 at the moment, whose pay keeps pace with inflation, may see their earnings increase by c10 – 13 per cent by the time the freeze ends.
This would mean an increase in the tax paid relative to income by 2 – 2.6 per cent in the final year of the freeze. This could be worth more than £1,000 in extra tax relative to expenditure.
What can I do about it?
The budget left open a number of established personal tax planning opportunities. Personal contributions to pensions increase the basic rate tax band, so can reduce the tax paid at higher rates. Individual Savings Accounts (ISAs) still allow invested money to grow without affecting your tax bands.
Though considered higher risk than mainstream investment types, tax privileged investments such as Venture Capital Trusts, Enterprise Investment Schemes and Social Investment Tax Relief can reduce the tax you pay in your year of investment.
Speaking to your Accountant and Financial Adviser will help you to understand the allowances available and the key benefits and risks of each of the options.
Please note: The budget is a 110 page document, so this article is intended as a summary of some of the high-level points rather than a comprehensive account. Many changes were announced in relation to businesses and getting the UK economy up and running. This area is intentionally not covered in this article.
This communication is for general information only and is not intended to be individual advice. It represents our understanding of law and HM Revenue & Customs practice as at 5th March 2021. The value of investments and the income derived from them can fall as well as rise. You may not get back what you invest. You are recommended to seek competent professional advice before taking any action.
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