Given the damage to the economy from Covid and the governments astonishing spending to deal with it, many people were expecting painful tax rises in the budget.
The treasury has been spending like never before in peacetime. The cost of furlough payments to support jobs, loans to support businesses, the cost of vaccine, building emergency hospitals and supporting an already stretched NHS have all helped build a deficit of around £335billion.
The government’s generosity may have helped get the country through the disaster that was 2020 and prepared it for recovery in 2021 – but somehow or other, it will have to be paid for.
The Chancellor’s budget on 3rd March caused many a sigh of relief when tax rises were not produced from the Red Box, for individuals at least. The Chancellor’s thinking seems to be that with 700,000 people losing their jobs, unemployment already at a five year high and the economy shrinking by 10%, the last thing the economy needed was more punishment with a round of tax hikes.
At first glance, the Chancellors budget looked as though he is expecting the recovery to pull the country out of the pit of debt that it has fallen into, rather than a raid on our pockets.
Or has he found a way to increase tax without appearing to?
Income tax thresholds have been frozen
It seems that he may have done exactly that.
From 6 April 2021 the personal allowance will increase from £12,500 to £12,570 and will remain fixed at this level until April 2026 while the basic rate band will also increase from £37,500 to £37,700 and because this will also remain fixed at this level until April 2026 this means that for tax years 2021/22 to 2025/26 inclusive, the threshold at which higher rate tax will become payable (the personal allowance plus basic rate band) will be fixed at £50,270.
The threshold above which additional rate tax becomes payable remains unchanged at £150,000 so for individuals with a full personal allowance, the 40% higher rate will apply to income between £50,271 and £150,000 and 45% tax will continue to apply to income above £150,000.
‘This policy will remove the incremental benefit had the threshold increased with inflation, but we are not hiding it. I’m here explaining it in the House,’ ‘It is a tax policy that is progressive and fair.’ ‘Nobody’s take home pay will be less than it is now as a result of this policy.’ Chancellor Rishi Sunak.
No tax rates are being increased, but many of us will be paying more money. This scenario is dubbed a ‘stealth tax.’
Pensioners will be hit
Well-off pensioners will also be hit by a freeze on the pensions lifetime pension allowance.
The lifetime allowance is the threshold above which pension withdrawals are taxed and currently stands at £1,073,100 and applies to annual incomes as well as lump-sum withdrawals.
This threshold was set to rise by £5,800 in line with inflation in the new tax year, but the tax freeze means this won’t happen.
Inheritance tax is frozen too
Inheritance tax (IHT) thresholds have been frozen in at their current tiers.
The nil-rate band will be kept at £325,000 and the resident nil-rate band at £175,000 until 2025/26. The nil-rate taper will also remain at £2m.
And so is Capital Gains
The government also announced it is freezing the annual exempt threshold of £12,300 for individuals and £6,150 for trusts, under which no capital gains tax is liable on the disposal of an asset.
Can you avoid any of these stealth taxes?
The crisis will have to be paid for somehow, and we might prefer stealth tax to punitive hikes and a programme of austerity, but it still means that more of your money will be going to the government.
That makes it all the more important to take full advantage of your 2021/22 tax allowances – even if they have been frozen.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable tax or investment strategy, you should seek independent financial advice before embarking on any course of action.
The value of investments can fall as well as rise and you may get back less than you invested.
Levels and basis of reliefs from taxation are subject to change and depend upon your personal circumstances.
The Financial Conduct Authority does not regulate taxation advice.
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