With borrowing approaching a record £400 billion, an unemployment rate of 5.1% and rising, this Budget was never going to be a giveaway for the taxpayer. Sunak balanced freezing of tax allowances, without increasing personal tax rates, to leave consumers with money to spend to get the economy moving again. A sort of buy now pay later deal.
The need for further tax rises later in this Parliament will depend upon the strength of the economic recovery once lockdown eases. Those with savings and investments, expecting increases in tax rates or huge reductions in allowances, have reasons to be cheerful for now.
The freezing of tax allowances for income tax, capital gains, inheritance tax and pensions savings until 2026 may not matter much in the short term as inflation is currently low at 0.7%. Yet if the economy rebounds, economists expect it to rise rapidly. What that means for taxpayers is: -
The impact of a 2% inflation rate, which is the Bank of England’s target rate, would reduce the value of the frozen allowances as follows:
|Tax Allowance||Allowance 2021 £||Allowance 2026 after inflation adjusted @ 2% £|
|Zero rate income tax||12,570||11,384|
|40% income tax threshold||50,270||45,529|
|Capital gains allowance||12,300||11,140|
|Inheritance Tax Allowance||325,000||294,352|
|Pension Savings Allowance||1,073,100||971,906|
Strategies for Preserving Family Wealth
Individuals may need to employ more strategies and use a wider variety of savings vehicles to help their money maintain its net of tax buying power. That may mean using some of the allowances and reliefs which have perhaps been neglected during two decades of relatively low taxation.
This could include: -
The success of the Chancellor’s balancing act depends upon the impact of vaccination on the ability of the economy to fully reopen in the Summer, for businesses to make profits, giving a rising corporation tax take from 2023. Should that be derailed, tougher personal tax measures, as rumoured before this Budget, and set out by the Office for Tax Simplification, may be brought forward. While we may hope that won’t be necessary, taking the opportunity to plan family finances within current tax rules and allowances would be prudent.
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Public Policy & Communications Director
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