Although the latest Budget did not see any policies introduced that would result in an immediate, significant rise in personal taxation, the Chancellor’s decision to freeze many of the allowance offered to taxpayers could have a big impact in years to come.

Under the Government’s decision, all personal tax allowances will remain frozen between April 2022 and April 2026.

Several personal thresholds have increased in the current tax year, but these will now remain frozen for the next four tax years.

Income Tax is one area that increased this April in line with the CPI before being frozen, alongside National Insurance contributions.

It is currently £12,570, but will now remain unchanged until at least 2025. Similarly, the Income Tax higher rate threshold has risen to £50,270 and will now remain frozen until April 2026.

For most taxpayers this will mean they see an incremental increase in the amount of tax they pay, although how much their tax bill increases by could be determined by an increase in earnings and tax planning.

When it comes to pensions, the pensions lifetime allowance will now remain at its current level of £1,073,100 until April 2026, as will the £40,000 annual pensions allowance.

This change will make it hard for some taxpayers to benefit from making tax-free contributions to their pension pot to reduce their overall tax bill and long-term it could affect a person’s retirement plans by reducing the amount they are able to save without a tax charge.  

The Capital Gains Tax annual exempt amount will also remain at £12,300 for individuals, personal representatives, as well as some types of trusts.

This may reduce a taxpayer’s ability to dispose of assets without incurring a Capital Gains Tax bill, which again could affect a person’s plans for later life.

The main and residence Inheritance Tax nil-rate band will also not change, remaining remain at current levels (£325,000 per person for the main nil-rate band and £175,000 for the residence nil-rate band) until 2026, while the residence nil-band taper will also continue to start at £2 million.

Initially, these changes may seem fairly insignificant, but when you consider the accumulated loss of tax savings from the incremental changes to these personal tax allowances each year and factor in inflation it is clear to see that by 2026 many of us will be paying much more tax – including many workers on lower pay who may be taxed for the first time.

With this in mind, taxpayers should take suitable steps now to ensure that their finances are tax-efficient now and in the future.

If you would like to discuss your personal tax situation, please contact your Seymour Taylor representative today or email or call 01494552100.This blog is for guidance only, professional advice should be obtained before acting on any information contained herein. The information was correct at the time of publishing 24 March 2021.

Posted in Blog news.