Today’s announcements on personal tax mean that once the personal allowance increase already announced for 2021 takes place we will see the personal allowance (£12,570 from the 6 April 2021) frozen until 6 April 2026.
As earnings wages increase by inflation, there are increasing numbers of people whose income will trip over into higher rates of tax. The Government’s figures for the Budget seem to confirm the incremental effect such a freeze will have on the amount of Income Tax paid. Indeed, the tax burden as a proportion of Gross Domestic Product (GDP) is forecast to increase to 35%, making it the highest it has been since the late 1960s.
The Government “Red Book” figures show that in 2022-23, this change will increase the tax take from income tax by £1.5bn, but this increases more than fivefold to over £8bn by the 25-26 tax year. The effect of this freeze will reset many individual expectations of their average tax rate as the additional income they receive over this period is subject to higher rates of tax.
The issue is no doubt at its most acute for those whose earnings will exceed the £100,000 threshold and so suffer 60% rate of tax on part of their income. This rate isn’t in official rate tables it is a combination of the loss of an individual personal allowance at one end and the additional 40% tax at the other on this income exceeding £100,000.
For those who will be worst affected by these changes, there is some relief in that the Chancellor did nothing to restrict higher rate pension reliefs, so the opportunity remains to make contributions to pensions, which not only boosts pension but also reduces taxable income now.
The Chancellor also froze the allowances for CGT and IHT until April 2026. Government figures suggest that additional IHT will increase from £70m in 2022/23 to £445m just three years later.
Further tax announcements are to be made on 23 March. Given the Chancellor is clearly, and quite rightly, concerned to manage our national debt against the risk of increased interest rates as it nudges toward 100% of GDP, we might expect that the journey towards an increased tax burden has perhaps only just begun as the final bills start to come in for the massive financial support the country has provided to get us through the past 12 months.
The temporary reduction in the nil rate band of £500,000 was due to revert back to £125,000 on 1 April this year. This has resulted in savings of up to £15,000 on the purchase of residential properties. In a move which will be welcome to estate agents as well as house buyers, the reduction will now remain in place until 30 June 2021 when it reduces to £250,000, and will revert to its normal rate on 1 October 2021. The maximum savings between July and September will only be £2,500 so there will be a rush to complete purchases before 30 June.
This announcement comes alongside a welcome programme of Government support for homebuyers seeking 95% mortgages.