Rishi Sunak, the Chancellor of the Exchequer, delivered the UK Autumn Budget on 25 October.
As anticipated, the presentation brought along no significant changes to the financial services landscape in terms of tax and estate planning or opportunities, but has confidently been considered as the foundation of a stronger economy for the future, with emphasis on high skills and high productivity.
Whilst the budget does not draw a line under Covid with “challenging months ahead”, the United Kingdom is said to be recovering faster than our major competitors. Alike our foreign counterparts, inflation is a particular concern, which was put down to an increased global demand for goods and energy, at a time of major supply disruption. Inflation in September was 3.1%, and likely to average out at 4% over the next year.
Despite this, the Chancellor believes that the economy is “fit for a new age of optimism”, forecasted to return to pre-Covid levels at the turn of the year, with annual growth forecasted at 6.5% and 6% in 2022. Unemployment is expected to peak at 5.2%, 6.7% less (representing 2 million people) than was expected at the height of the pandemic during July last year. Furthermore, wages have grown in real terms by almost 3.5% compared to February 2020.
The OBR (Office for Budget Responsibility) has said that the tax burden has and will continue to rise, given that many of the tax thresholds were frozen during the March 2021 budget. Let’s take a closer look at the tax and estate planning details, with an overview of the changes that have been brought in since the budget earlier this year.
The Personal Allowance and higher-rate thresholds were frozen for five years from March 2021.
The Personal Allowance therefore remains at £12,570, and the higher-rate tax band continues to begin at £50,270 of income. Taken together with wage rises, this means more people are likely to fall into the higher- and additional-rate tax bands and could potentially see their Personal Allowance tapered should their adjusted income exceed £100,000.
The Chancellor confirmed in his budget that the temporary 1.25% rise in national insurance contributions from April 2022 (replaced by the new health and social care levy at the same rate from April 2023), is going direct to the NHS and social care as promised. Unlike NI contributions, the levy will also be paid by working state pensioners.
The government also announced in September a rise to dividend tax of 1.25% from April 2022. The new rates will therefore be 8.75% for basic-rate taxpayers, 33.7% for higher-rate taxpayers and 39.35% for additional-rate taxpayers. The dividend allowance remains unchanged at £2,000.
Capital Gains Tax (CGT)
Since the Office of Tax Simplification’s recommendation in November 2020, there has been speculation that CGT rates could be aligned to income tax. This could see higher- and additional-rate taxpayers paying more than double the current rate. Fortunately, no changes in respect of this were announced.
The annual exemption remains unaltered at £12,300 and will be frozen until 2026.
Fortunately, no limitations were imposed on the maximum contributions that investors and savers can make to their tax-free investments. The main ISA allowance remains at £20,000, and Junior ISAs at £9,000.
Despite rumours that pensions tax relief might move to a flat rate of 25%, the current rates were left untouched; pension savers can continue to receive tax-relief at their marginal rate of income tax. The annual allowance also remains at £40,000, or 100% of an individual’s earnings (whichever is lowest). The tax reliefs available via pensions will be more valuable than ever, as more individuals are likely to fall into the higher-rate tax bracket.
The Lifetime Allowance (the limit you can build up in pension benefits, whilst still enjoying the full tax benefits) remains unchanged at £1,073,100 and is frozen until April 2026.
The government has now committed to mitigating the “net pay anomaly”, which currently sees low earning, non-taxpaying individuals lose out on 20% tax relief on their personal contributions if they are part of a net pay pension scheme, as opposed to a Pension Tax-Relief at Source (PRAS) arrangement. Disappointingly, the government’s plans won’t be actioned for a further three years, however, from April 2025, those affected can claim top-up pension contributions (made from 2024/ 2025 onwards).
Following the March budget, from April 2023 the rate of corporation tax will increase to 25% on profits over £250,000. For profits below £50,000, the rate will remain at 19%, and relief will be available for businesses with profits under £250,000 so that they do not pay the new highest rate.
Inheritance Tax (IHT)
The Nil Rate Band (NRB) and Residence NRB were also frozen in March at £325,000 and £175,000 respectively. Individuals therefore have a maximum allowance of £500,000 (£1m for married couples), before suffering 40% on the value of their estate liable for IHT. The Residence NRB will continue to taper by £1 for every £2 that the value of the estate exceeds £2m.
An overview of the wider plans
More broadly, in an endeavour to help businesses and families recover from the ramifications of Covid-19, the government plans to implement the following:
- The National Living Wage is to increase by 6.6% to £9.50 an hour, which is said to see an annual pay rise for the full-time worker of £1,000 per annum.
- Following the removal of the £20 per week uplift to Universal Credit at the beginning of October, a promise has been made to cut the respective taper relief by 8% (from 63% to 55%) no later than 1 December 2021.
- Healthcare spending to rise by £44bn to over £177bn by the end of the current parliament (May 2024), the largest rise this century.
- £24bn earmarked for housing, with £11.5bn set aside for 180,000 affordable homes.
- The planned fuel duty rise of 2.84p has been scrapped, freezing fuel duty for the twelfth consecutive year.
- A one-year 50% discount to business rates for those operating in the retail, hospitality, and leisure sectors.
- A new ‘draught relief’, which sees a new lower rate of duty on draught beer and cider cut rates by 5%.