Personal Tax – Budget 2021

As somebody who specialises in tax for individuals you will forgive me for perhaps hoping for some excitement from this Budget. I appreciate it is all relative. What we had for individuals was the opposite, in fact it reduced some of the excitement for a long time ahead. It was a tale of frozen allowances.

Income Tax

The personal tax allowance, the amount of income you can receive before paying income tax, increases a full £70 on 6 April 2021 to £12,570. And there is will stay, until 6 April 2026. It is a number we will become rather familiar with. This allowance will continue to be clawed back from those with incomes over £100,000 a year and removed in full on income over £125,140.

Those couples that benefit from the transferrable marriage allowance, of 10% of the personal allowance, will be able to transfer £1,260 rather than the mathematical 10% limit of £1,257.

The basic rate band will increase to £37,700 from 6 April 2021 and stay at that amount until 6 April 2026. With the personal allowance this means the higher rate tax threshold be £50,270 for that five year period.

The national insurance upper earnings and profit limits will be aligned to £50,270 for the period as well.

The Government’s figures estimate that the changes will bring a further 1 million taxpayers into the higher rate of tax and 1.3 million into income tax by 2025/26 compared with increasing the limits by inflation, increasing tax revenue each year, up to around £8 billion in 2025/26. Rishi Sunak said he was committed to the promise not to raise income tax or national insurance and that “no-one’s take home pay will be less than it is now as a result of this policy”. That is technically true but of course overlooks the real impact of inflation and buying power.

The legislative default is that the allowances and thresholds will increase by CPI inflation from 2026.

Except for small changes to the old style married couples allowance (where one of the couple was born before 6 April 1935) and the blind persons allowance, the other allowances, or more accurately nil rate bands, for savings, dividends and interest remain as before as do the various income tax rates. These have only been announced up to 5 April 2022.

Capital Gains Tax

There was plenty of press discussion over possible increases to capital gains tax. As it turned out, the annual capital gains exemption, which is currently £12,300 will be frozen until 6 April 2026.

No changes to the rates were announced and the annual allowance has not decreased as speculated.

Inheritance Tax

Inheritance tax is no stranger to a frozen nil rate band. It has been £325,000 since 6 April 2009 (not a typo), where it will now remain until 6 April 2026. That it 17 years unchanged.

The residence nil rate band, which is the allowance for when the main home is passed down the generations on death, is to be frozen at £175,000 in line with the main nil rate band. This is clawed back on estates over £2million.

A married couple, or civil partners, can still transfer unused nil rate bands and residence nil rate bands on death to achieve the potential £1million inheritance tax “allowance”.

Pensions

There was little by way of comment on pension funds, and in particular there was nothing on pension contributions tax relief or annual allowances. However, the current lifetime allowance of £1.073million will be frozen until April 2026; it was due to increase annually by CPI.