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Pundits are still digesting the Budget released near the start of March 2021. Yet the implications for tax planning have become much clearer. Here at Cedar House, our financial planning team wanted to offer this guide on what the March 2021 Budget means for your tax plan.
If you’d like to find out more or discuss your own financial plan with us, please contact our team for more information or to access personalised financial advice:
020 8366 4400 or email@example.com
The Conservative Party had promised to not raise income taxes into its manifesto prior to its 2019 general election victory. Technically, the March budget has stayed true to this. However, the Chancellor has announced a freeze to the personal tax allowance (at £12,570) from the 2022-23 tax year. This will remain in place for three years, and the higher rate threshold will be set at £50,270 over the same period.
Since the cost of living is likely to increase (inflation) over coming years, and average UK wages too, these measures have been dubbed a “stealth tax” by some commentators. This is because most people are unlikely to notice since they do not lose any income – even though it does not stretch as far as it did before.
It’s a clever way for the UK government to raise more money to try and pay down COVID-19 debt without spending too much political capital. According to the OBR (Office for Budget Responsibility), these measures will likely lead to 1.3m more people paying income tax and push an extra 1m into the higher rate. If you are concerned that this may detrimental affect you, then get in touch with our financial planning team. There may be strategies to help put money back into your pocket and mitigate the impact (e.g. using pension contributions).
Pensions & inheritance tax (IHT)
Similar to the above, the lifetime allowance for pensions has been frozen at £1,073,100 until 2024. The IHT tax-free threshold has also been frozen at £325,000 until further notice. The former was initially supposed to rise by 0.5%, allowing pension savers to put over £76,000 into their pension(s) by 2025. For non-public-sector workers, this is likely to hit them harder since they are less likely to have a defined benefit pension. The lifetime allowance for these schemes is calculated, typically, by multiplying the annual retirement income by a factor of 20 – which is more likely to fall within the frozen threshold.
For those concerned about their future IHT bill and/or exceeding the lifetime allowance, financial advice can be beneficial. There may be legitimate strategies available to mitigate the impact – e.g. leveraging ISAs in balance with pension contributions.
Property & mortgages
For most people, the biggest monthly outgoing is likely to be the mortgage. For many people, therefore, announcements in the March 2021 Budget were likely welcomed. The “stamp duty” holiday will be extended until September. After this, a taper will apply until the 1st October. This has brought buoyancy to the housing market (good for sellers) and lowered costs for many buyers too. First-time buyers will also likely be pleased to hear that 5% mortgages will soon be offered again by lenders, after the UK government announced it would underpin them. However, bear in mind that the smaller your deposit, the more interest you are likely to pay, and the higher your monthly mortgage commitment is likely to be.
Investments & savings
Fortunately, the Chancellor announced no changes to the £20,000 ISA allowance, or to rules allowing interest, capital gains and dividends within these “tax wrappers” to be generated free from tax. There is also a new “green” government investment on its way to investors through the NS&I Premium Bonds scheme, with more details to follow.
General finances & businesses
Consumers may be intrigued to hear that the current £45 cap on contactless payments will rise to £100 (date to be confirmed). VAT on restaurants, hotels and attractions will continue at the reduced rate of 5% until September to incentivise economic activity in these sectors. Taxes on alcohol will remain in place, avoiding a widely-speculated rise. The same is true for fuel duties. All of these measures are likely to put a bit more money back into your pocket – easing some of the extra “stealth tax” mentioned above from the personal tax freezes.
Perhaps the biggest headlines have come from the rise in corporation tax, which will apply to businesses earning £50,000 or more in profits. From 2023, these companies will start paying up to 25% via a taper system. This is unlikely to affect small businesses, but could eat into the profits of larger ones – inhibiting their ability to re-invest into the company.
There are many other areas of the budget which affect tax planning. We have been unable to cover everything here. Yet we hope this informs your thinking on some of the main areas.
Interested in discussing your financial plan with an experienced financial adviser? Get in touch today to discuss your financial plan with a member of our team here at Cedar House via a free, no-commitment consultation:
020 8366 4400 or firstname.lastname@example.org