Sunak’s Stealth Tax in Budget 2021
You may have noticed that a certain phrase came up more than once in the Chancellor’s Budget 2021 speech last week.
The phrase went something like this:
Allowances/rates will be frozen at this level until April 2026.
That’s four years of flat-lining rates and allowances and it applies to income tax, capital gains tax, inheritance tax and pension tax relief.
At first glance this may seem like a good deal for taxpayers, no tax increases, but all is not what it seems.
Income tax changes in budget 2021
Because wage rates tend to increase over time, and hopefully we should soon be moving out of recessionary times, then if your tax-free allowance is pegged to a fixed amount (£12,570 for income tax purposes), more and more of your extra earnings will be subject to tax.
The budget also pegged the basic rate threshold for income tax at £37,700 for the same period. This measure will likely mean that an increasing number of individuals will find themselves paying income tax at the 40% or higher rates for the first time.
Capital Gains Tax (CGT)
As assets subject to CGT when sold, second homes for example, tend to increase in value over time, as the tax-exemption is being pegged – currently £12,300 a year – an increasing amount of any profit on disposal will be taxed.
Inheritance Tax (IHT)
At present, lifetime gifts are potentially subject to this tax as well as your estate when you die. Currently, and until April 2026, £325,000 of your estate is exempt from this tax and your executors can also claim up to an additional £175,000 relief that relates to your family home.
As with CGT, as the value of your estate will likely rise in value between now and 2026, more of your assets will be subject to IHT.
Pension allowance changes in budget 2021
In a similar vein, as the amounts of allowable pensions savings are being pegged at £1,071,100 and the annual contributions allowance at £40,000, it will not be possible to inflation proof your pension pots if you have already reached this savings limit (£1,071,100). In fact, you could top-up pensions savings above these limits, but punitive tax would be levied on any excess.
It will be interesting to see if the Chancellor can maintain this hiatus in tax allowances as the next general election looms, 2 May 2024.
You can find out all the details of the 2021 Budget in our dedicated web section here.
About Jon Pryse-Jones
Since joining THP in 1978, Jon Pryse-Jones has been hands on with every area of the business. Now specialising in strategy, business planning, and marketing, Jon remains at the forefront of the growth and development at THP.
An ideas man, Jon enjoys getting the most out of all situations, “I act as a catalyst for creative people and encourage them to think outside the box,” he says, “and I’m not afraid of being confrontational. It often leads to a better result for THP and its clients.”
Jon’s appreciation for THP extends to his fellow team members and the board. “They really know how to run a successful business,” he says. He’s keen on IT and systems development as critical to success, and he continues to guide THP to be at the cutting edge and effective.