Budget commentary 2021.

Personal allowance, tax rates and tax bands

Despite the rumours, the Chancellor of the Exchequer, Rishi Sunak, is keeping with the Conservative 2019 manifesto pledge not to raise the rates of income tax, VAT or national insurance.

Everyone has an income tax personal allowance – for this tax year (2020/21), it is £12,500, meaning you can earn that much during the year before you start paying tax.  However, despite widespread predictions of an immediate freeze, it will increase to £12,570 for next tax year before being frozen at this level until April 2026.

Similarly, the higher rate tax threshold which presently stands at £50,000 will increase to £50,270 for 2021/22 before also being frozen until 2026.

For information, set out below are the 2021/22 tax rates and thresholds for England, Wales and Northern Ireland:

*Your Personal Allowance may be greater than £12,570 if you claim Marriage Allowance or you are eligible for the Blind Person’s Allowance.  Those earning more than £100,000 will see their Personal Allowance reduced by £1 for every £2 earned over £100,000.

Income tax (Scotland)

The Scottish Government sets out its spending and taxation plans for 2021/22 in its annual budget and proposed the following rates and bands:

*As with the rest of the UK, those earning more than £100,000 will see their Personal Allowance reduced by £1 for every £2 earned over £100,000.

Dividend tax allowance

You only have to pay tax if your dividends exceed the dividend tax allowance in the tax year which for 2021/22 will remain at £2,000. However, you don’t pay tax on dividends from shares in an ISA.

The tax you pay depends on your income tax band – please note, you must add your dividend income to any other taxable income to determine the rate of tax you will pay.

Personal savings allowance

This was first introduced in 2016 and applies to savings income such as interest on savings accounts, gilts or corporate bonds.  The allowance remains at £1,000 for basic rate tax payers and £500 for higher rate tax payers.

ISAs

The ISA allowance subscription limit for 2021/22 will remain unchanged at £20,000 and the annual subscription limit for Junior ISAs and Child Trust Funds will remain at £9,000.

CGT

Mr Sunak made no mention of the much-speculated increase in capital gains tax (CGT) rates to match income tax but the annual exemption will remain unchanged at £12,300.

All individuals will continue to have a CGT exemption of up to £12,300 of gains. This will remain frozen at this level until April 2026.

Above this, CGT will continue to be paid at 10% (18% for second properties or buy to let) if the chargeable gain falls within an individual’s basic rate band. Any gain that is above an individual’s basic rate band will be charged at 20% (28% for second properties or buy to let).

Pensions

As widely rumoured and in line with both the CGT and inheritance tax (IHT) exemptions, the Chancellor has announced the freezing of the pension lifetime allowance until April 2026.

The lifetime allowance is the amount of pension people can save before they are taxed on it.  Any amount you have in your pension above the lifetime allowance is subject to a tax charge. It is a one-off charge of 25% if the excess is taken as income, or 55% if paid as a lump sum.

It has been the focus of change for many years since its introduction in 2006.  The lifetime allowance originally started at £1.5m, rising steadily to £1.8m by 2011 before being cut to a low of £1m by 2016.  Since 2018, the allowance has risen in line with inflation and was expected to rise by £5,800 to £1,078,900 for 2021/22 but has now been frozen at the current level of £1,073,100.

Such a measure is often seen as a ‘stealth tax’ and could drag many pensioners into the lifetime allowance tax net.  Although this will only impact people who already have substantial pension pots, the limit could be closer than some realise, and not just for high earners but also those in valuable final salary pension schemes.  There is also a real risk that freezing the allowance will only discourage saving towards retirement.