On 3 March, Chancellor Rishi Sunak, delivered his “Budget for recovery”. Without doubt this was one of the most anticipated budgets in memory, with much speculation on how he plans to deal with the huge black hole of debt accumulated during the pandemic.

Many of the rumoured changes did not transpire this time round. In particular, there was no major reform to Capital Gains Tax (CGT) and Inheritance Tax (IHT).

Instead, the Chancellor has chosen a policy of fiscal drag to increase tax revenue by freezing various allowances for a period of five years which will result in many individuals being dragged into higher tax brackets.

Reducing the impact of these increasing tax bills can often be possible with some planning. Here is a summary of some of the changes along with planning considerations that can be used to lessen the rising tax burden.

Income Tax rates frozen

The Personal Allowance will increase to £12,570 in tax year 2021/22 and will then be frozen at this level until April 2026. The higher rate band for non-Scottish taxpayers increases to £50,270 in tax year 2021/22 and will also be frozen until April 2026. In Scotland the Personal Allowance rules will apply, however other bands above the Personal Allowance are set by Scottish Parliament.

With this in mind, investors in retirement could benefit from reviewing income strategies, especially from pensions and investments. Simple tweaks to how income is taken, and ensuring the various tax allowances are utilised, can often result in tax savings. 

As wages continue to rise, an increasing number of individuals will become liable to higher levels of tax. Generous tax relief on pension contributions means investors can offset the additional tax as well as boosting their retirement pot.

There are no changes to the £5,000 savings rate band, £2,000 dividend allowance or the £1,000 savings allowance, and no change to the Income Tax rates. The Chancellor reconfirmed his promise not to increase Income Tax rates.

Pension Lifetime Allowance frozen

Previously, the Pension Lifetime Allowance was due to increase in line with Consumer Prices Index (CPI) inflation, this has now been frozen at the current level of £1,073,100 until April 2026. Over time, the freeze will result in an increasing number of investors exceeding the limit, incurring a 25% tax bill on any additional income or 55% on any lump sums.

As well as investors with defined contribution pensions with combined values close to or above the limit, it is also expected that medium to high earners in the public sector such as Doctors, Dentists and Head Teachers who are building up significant defined benefit pensions will be adversely affected by this change.

Individuals should establish the risk of exceeding the figure by calculating the value of pensions now, and project this figure forward to retirement. We can use modelling tools to assist our clients obtain a clear picture of any potential liability in the future.

Once there is an understanding of the current position, consideration can then be given to options available. It is important to note here that sometimes it is advantageous to breach the limit to continue receiving contributions from employers and mitigate the effects of other types of taxation such as Inheritance Tax.

Inheritance Tax – Nil Rate Band frozen

Reform in this area had been expected by many, however the only announcement made for the time being is that the Nil Rate Band will remain frozen at £325,000 and the Main Residence Nil Rate Band won’t increase from the current level of £175,000 until April 2026.

Options available for the mitigation of Inheritance Tax have therefore remained unchanged for the time being with several solutions available including gifts, Trusts and the use of Business Relief.

With four separate reports in the last few years proposing numerous ways IHT planning can be amended, reform still seems likely at some point in the future. With this in mind, if you are planning to pass on wealth to family or loved ones and want to reduce your liability to Inheritance Tax, don’t put off looking into this. Planning in this area can be complex and take time to consider. You should start to review this area as soon as you are ready to do so.

Capital Gains Tax- annual exemption frozen

It was widely expected that Capital Gains Tax (CGT) rates would increase in line with income tax rates. This may still happen in the future, however for the time being the annual exemption of £12,300 has been frozen until 2026.

Over the years, many clients have accumulated significant gains within their taxable investment portfolios. Whilst tax wrappers such as ISAs, SIPPs and offshore bonds have been widely used to shelter investments from tax, many clients still have taxable investments.

Considerations should be given to utilising the annual allowance. Furthermore, if you are considering disposing of an asset which has increased in value, it may be worth realising gains sooner in order to lock in current CGT rates in anticipation of any future rises.

Corporation Tax rate increase

This was one of the bigger announcements with the main rate of Corporation Tax due to increase from 19% to 25% in April 2023 for company profits above £250,000. A new small profits corporation tax limit will be introduced where profits are below £50,000. Profits between these levels will be taxed on a tiered basis.

As an allowable business expense, company pension contributions reduce profits assessable for corporation tax and are therefore a tax efficient way to remunerate Company Directors. 

The earnings cap does not apply but consideration needs to be given to an individual’s tax position. 

Introduction of a Green Savings Bonds

Expected to be introduced in Summer 2021, Green Savings Bonds will provide savers the opportunity to “take part in the collective effort to tackle climate change” and will be available through the government backed savings organisation NS&I.

At Johnston Carmichael Wealth we are having increasing numbers of discussions with clients looking to invest in a responsible and sustainable manner. These new bonds will no doubt prove attractive to savers keen to support green projects.

Although interest rates are yet to be announced it is expected that uptake of this new product will be high for savers seeking alternative ways to invest in cash at a time of ultra-low interest rates.

Tax Day

On 23 March  the Treasury will announce any new consultations on future tax reform and we will be watching this closely to gauge changes that may be coming down the line and will update you once we have digested the detail.

Get in touch

If you would like to chat through the impact of any budget announcements to you, please get in touch with me, a member of the Johnston Carmichael Wealth team or your usual Financial Planner.

Johnston Carmichael Wealth Limited is authorised and regulated by the Financial Conduct Authority.

This article is intended to provide a general review of certain topics and its purpose is to inform but not to recommend or support any specific investment or course of action.

This article is based on our understanding of tax legislation as at 03/03/2021. The benefit of any reliefs or allowances will depend upon your own situation. All statements concerning the tax treatment of products and their benefits are based upon our understanding of current tax law and HMRC practices both of which are subject to change in the future. Levels and bases of reliefs from taxation are also subject to change and are dependent on your individual circumstances.