Rather than explicit changes to tax rates, ‘stealth’ tax rises through the freezing of income tax, Capital Gains Tax (CGT), Inheritance Tax (IHT) and Pension lifetime allowances were the order of the day and will result higher tax bills for an increasing number of individuals over the years to 2026.
Five tax years is a long time to freeze these allowances – particularly during a period of anticipated recovery and perhaps inflation - and the impact of some of these freezes could be significant. Although increases to the threshold at which income tax becomes payable and the higher rate threshold had been agreed for the 2021/22 tax year at £12,570 and £50,270 respectively, the Office for Budget Responsibility estimates that freezing these thresholds at these amounts through to 2026 will bring an additional 1.3 million people into paying income tax and 1 million more into paying tax at 40%.
Similarly, locking the standard pension lifetime allowance at £1,073,100 until 2026 could see savers affected face an additional £75,000 tax charge on excess funds that they might not have faced if the allowance had increased at an average CPI rate of 2.5% per annum over that period. It also means that pension savers who perhaps didn’t consider the lifetime allowance to be much of an issue given the current value of their fund may need to revisit the impact that investment growth through to 2026 may have against a lifetime allowance frozen at £1,073,100. Both of these groups will need to review their situation and consider whether it is appropriate to take action to mitigate any potential excess charge.
Overall, the Budget seems to have been well received by both individuals and businesses, and whilst it was pleasing from a planning perspective to see no significant change to the major tax regimes, it will be interesting to see how far the changes in this Budget actually go towards ‘balancing the books’. Sometimes what isn’t announced turns out to be just as important as what is - one point that did not make many of the post Budget press articles was that the tax-related consultations that are usually announced on the day of the Budget will be published on 23rd March instead. The reason given by the Treasury for this delay was to ensure that “tax professionals will have a better opportunity to feed into consultations and policy discussions”.
The cynic might suspect that to announce these on the same day may have taken some of the shine off the reviews of the Chancellor’s speech. It might also suggest that the freezing of the various thresholds and allowances until 2026 might not turn out to be such an issue, if those same allowances are reformed as part of the Government’s plans to “create a tax system fit for the challenges and opportunities of the 21st century”. With consultations on IHT and CGT already carried out by the Office of Tax Simplification in recent years, it is possible that further consultations on aspects like the pensions regime and property taxation are announced.
With the recent consultations completed and published without delay and the Chancellor needing to be conscious of the potential timing of the next election, I can’t help but feel that there is more significant change to come over the next couple of years.
Individuals now have a window of opportunity to review their existing affairs and take advantage the allowances, exemptions, tax rates and reliefs that are currently available – some of which might look very generous when we look back in years to come. It may also make sense to bring forward planning that would have been undertaken in the near future – particularly where such planning is affected by taxes addressed in recent consultations (CGT and IHT) or those that might be announced later this month. With this in mind, there is no better time to get in touch if you would like to discuss any of the matters above. To speak with one of our financial planners, please call us or fill out our contact form below.
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