Chancellor Rishi Sunak once again pledged to do “whatever it takes” to protect the UK economy from the impact of coronavirus in today’s Budget. Most of the announcements were about spending to prop up the economy and support households, but there were, inevitably, some measures to claw back some of the UK’s Covid spending.
Laying out his vision for post-Covid Britain, the Chancellor drew upon a mixed economic forecast from the OBR, which predicts a stronger but somewhat delayed economic recovery with 2021 growth expectations falling from 5.5% to 4%. Bond markets were initially mildly disappointed with the projections of growth and borrowing. UK long-dated gilts fell 9 basis points during the speech, although the pound was pretty much unmoved in currency markets.
In terms of individual share moves, housebuilders were buoyed by an extension to the stamp duty land tax holiday, which was set to end at the end of this month, as well as the confirmation of a government-backed guarantee to mortgages with deposits of just 5%. The £500,000 nil-rate band for house purchases will be available until 30th June and at £250,000 until the end of September. There was also a reaction to the further wave of fiscal stimulus aimed at ensuring the hardest-hit areas of the economy receive ongoing support. There is a three-month extension to the business rates holiday for the retail, hospitality and leisure sectors until the end of June 2021, followed by 66% relief from July to March 2022, and an extension to the VAT cut for these areas.
Any significant book balancing through personal taxation is to be put off until after the UK’s economic recovery is well underway. There were no significant developments despite rumours swirling about possible increases to Capital Gains Tax, Inheritance Tax reform and even a ‘wealth tax’. However, with important limits frozen from the next tax year, it means the Chancellor is relying on 'fiscal drag', the impact of asset inflation and wage increases over time, to help increase the tax take and pay for the Covid crisis. It underscores the need to use valuable allowances such as ISAs as far as possible. While the impact of 'no change' is limited in the short term, it is effectively a gradual and stealthy means of upping individuals' tax liability.
Some additional burden will also fall on larger, profitable businesses. Corporation tax is to increase from 19% to 25% but remains at the current rate for two years. It will also remain at the lower rate of 19% for smaller businesses (with profits under £50,000) and there will be a relief for businesses with profits under £250,000 so that they pay less than the main rate. The negative for shareholders of UK companies is a smaller share of company profits coming their way in terms of dividends. However, the announcement of a new “super-deduction”, will allow companies to cut their tax bill by up to 25p for every £1 they invest qualifying new plant and machinery assets, which should help businesses increasing investment. The thorny question of what to do about levelling the playing field between high street and online taxation – including levying a so-called "Amazon tax" on online retailers – was left to another day.
The threshold at which people start to pay income tax will be raised from £12,500 to £12,570 and then frozen until 2026. Similarly, the point at which people start to pay the higher 40p rate will be frozen at £50,270. As wages rise this will bring extra revenue into the Treasury coffers without technically breaking the Conservative party’s 2019 manifesto pledge to not raise income tax.
The maximum you can save into your pension, the lifetime allowance, is to be frozen at £1,073,100 until April 2026 rather than indexed with CPI inflation as has been the norm up to now. If exceeded, there is a one-off charge of 25% of the amount if paid as a pension (meaning that you buy an annuity or take a regular income through drawdown), or 55% if paid as a lump sum. Without the freeze, the lifetime allowance would have risen by £5,800 in 2021-22 alone, so those with significant pension provision need to take extra care going forward.
One further interesting development is a new green savings product, linked to the UK’s inaugural green gilt, available from NS&I from this summer. Rates have not yet been revealed, but the funds raised will be used to fund projects on renewable energy and clean transportation to help the UK reach its target to cut greenhouse gas emissions to zero by 2050.
In summary the 2021/22 key allowances
- The ISA allowance remains at £20,000 for the new tax year starting on 6th April 2021, and the Junior ISA at £9,000.
- The standard pension annual allowance remains at £40,000 a year and is reduced, or ‘tapered’, for those with ‘adjusted income’ above £240,000. There’s more on how this works here. For those on the very highest incomes, the minimum level to which the annual allowance can taper down remains at £4,000. The lifetime allowance, the maximum amount you can accrue in a registered pension scheme in a tax-efficient manner over your lifetime is frozen at £1,073,100.
- The annual capital gains tax allowance for individuals will remain at £12,300. Capital Gains Tax (CGT) is the tax you pay when you realise a profitable investment – unless it is in a tax-efficient wrapper such as an ISA or pension. You can realise total profits on investments of up to the value of the allowance in a particular tax year without paying CGT.
- The inheritance tax thresholds are to remain at their current levels, a £325,000-per-person nil rate band allowance, which can be combined as a couple, and a residence nil rate band allowance of £175,000 per person, until April 2026. IHT is paid at a rate of 40% outside of these allowances.
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