Personal Taxes

The UK freezes personal tax thresholds by way of 2026

Chancellor of the Exchequer Rishi Sunak has announced the UK budget for 2021-22.

There was speculation about the introduction of a wealth tax, increases in tax rate bands, and / or capital gains tax (CGT) reforms after the Treasury Department ordered a system review last summer.

However, Sunak has been more cautious about paying off the country’s debt – currently at around £ 407 billion ($ 566 billion, EUR 470 billion).

Some personal tax thresholds will be increased according to the CPI rates for fiscal year 2021-22 and then frozen until April 2026, while others will remain at their current rates for the next five years.

“This budget is not the time to set detailed tax rules,” said Sunak as he presented the plans to the House of Commons.

With a different name

While the UK did not introduce a wealth tax per se to mitigate huge borrowing, it has been forced to grapple with the effects of the pandemic. Becky O’Connor, director of annuities and savings at Interactive Investors, believes the move will have a similar effect.

“Allowance freezes is a backward way of collecting taxes as wage and asset price inflation increase the number of people being pushed past the thresholds at which they must pay more taxes,” she said.

“The Chancellor has avoided overtly named wealth taxes by making these changes to existing allowances, which will result in higher tax burdens over the next five years for an increasing number of people building wealth – be it in annuities or real estate.

“The problem across the board is that what hits the rich today could hit ordinary earners and hardworking investors in the decades to come.”

Lifetime allowance

As widely reported in the UK press over the weekend, the pension LTA will not grow at the September 2020 CPI rate – just 0.5% – but will remain at its current level of £ 1,073,100 through April 2026.

John Westwood, Founder and Group Managing Director of Blacktower Financial Management, told International Adviser, “Rishi Sunak has announced a stealth tax on pension pots by freezing the lifetime allowance.

“This will throw the richest pension pots into the tax network and affect thousands of retirees for years to come. We believe that now is the wrong time to do this as there is already personal financial pressure due to the pandemic.

“The government needs to provide additional clarity on the inflationary context and the duration of the freeze so that retirees can save with confidence in the future.”

Dave Downie, technical manager at Standard Life, said that while the move will initially affect a small group of people, it risks spreading to ordinary retirees.

“For someone trying to keep their drawdown income withdrawals at sustainable levels that might last 30 years and take inflation into account, a withdrawal of around 3% means an annual pre-tax income of around £ 32,200,” he said.

“So this is not just affecting the highest employed, and a longer period without rising inflation will reduce that income quickly in real terms and could further affect confidence in pensions.

“However, it is important to remember that the LTA is not a cap on what can be saved in pensions. There are many good reasons for those potentially affected to keep saving for their retirement, especially if the suspension of funding means the loss of contributions from their employer. “

Look beyond pensions

Keith Richards, Executive Director of the Personal Finance Society, said, “Covid-19 highlighted the importance of motivating people to put cash aside to protect them from future financial shocks. By freezing personal tax thresholds and lifelong pension subsidies, the government cannot encourage people to save money for a rainy day and finance their later lives. “

Because of this, Alex Davies, executive director of the Wealth Club believes the decision to freeze the LTA for five years will inevitably force people to look elsewhere for sustainable retirement income in the future.

“The retirement benefit freeze is the latest blow to an increasing number of better-off pension investors,” he said. “It further affirms that they need to look beyond pensions to build a large retirement pot.

“We therefore expect more investors to turn to Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EIS). Though not quite as tax efficient as pensions and riskier; For seasoned investors, they are a very sensible option.

“But there is more. By and large, with pension investments you are only trading large company stocks with other investors. When you invest in VCTs and EIS, you are pumping new money into young and innovative companies that are supposed to create lots of jobs and economic growth. So this could be better news for government and business, especially if we want to grow our way out of the crisis. “

Income tax, CGT and IHT

Other allowances were also influenced by the budget.

The IHT zero rate bands will remain at the current level until April 2026. The zero rate bands remain at £ 325,000 and the resident zero rate bands remain at £ 175,000.

The residence’s zero band taper will also continue to start at £ 2m.

Income tax, along with social security contributions, is one of the few that the CPI says has seen an increase before being frozen. The personal allowance will be £ 12,570 as of April 2021 and will remain unchanged for five years.

The threshold for the higher income tax rate will also rise to £ 50,270 from next month to April 2026.

The CGT Annual Tax Exemption Amount (AEA) will remain at £ 12,300 for individuals, personal representatives and some types of trusts for the next five years. However, for most trusts the limit is £ 6,150, although Treasury documents did not specify the type of trust.

Les Cameron, Technical Director at Prudential UK, said, “As we know from the Office of Tax Simplification’s CGT review, the CGT allowance freeze has no real impact on the mainstream investor who is merely modifying the withdrawals so that they stay within the allowance. There will likely be entrepreneurs and real estate investors who will pay more taxes.

“The good news about freezing the IHT zero rate band is that there are many simple and straightforward solutions to ensure that people only pay IHT the amount they want to pay.

“The increase in tax bands and social security rates will result in a modest increase in take-away pay for all. This will be broadly somewhere between £ 22-50 for the next year. However, by freezing future inflation hikes, more people will transition to higher tax rates through wage increases by 2026. “

Green savings product for retail

One of the innovations in Sunak’s budget is the introduction of a savings bond for private customers, which is intended to “support environmentally friendly projects,” he said.

The product will be available this summer through National Savings & Investment (NS & I). It will “be closely linked to the UK’s green government bond framework and give all UK savers the opportunity to join the collective effort to fight climate change,” the Treasury Department said.

Gemma Woodward, Director of Responsible Investing at Quilter Cheviot, said, “So far, government climate policy has been a case of style over substance. We had big proclamations and short 10-point plans, but nothing more.

“Actions speak louder than words and the clock is ticking [the United Nations Climate Change Conference (COP26)] Later in the year we finally see government action to take us one step further on the path to net zero.

“The Chancellor today unveiled new government green savings bonds that serve the dual purpose of enabling retail investors to get involved in the green agenda while providing an outlet for the ‘accidental’ savings households built up during the pandemic to have.

“Ultimately, any measure that enables people to relate their own finances to the green economy and increase private investor access to a variety of green products is welcome.

“The million pound question, however, is how much will be raised by private investors through the green savings bond. Will it actually make any difference to the net zero effort? Perhaps not alone, but accompanied by green gilts for the institutional market, which will also be launched this year, they could make a difference.

“And success will depend on whether the money will ultimately be spent on truly green projects and how the government will measure the impact and report it to savers.”

Rachel Springall, a financial expert at Moneyfacts, expects the product to become hugely popular because “NS&I is a trusted brand” and “interest rates are at record lows,” prompting savers to “consider other ways to invest”.

Related Articles