Reeves Independent analyses the Budget 2021 to unearth any changes that may affect you, our valued clients.
On Wednesday, March 3, the Chancellor Rishi Sunak revealed his Budget for 2021/22 in the House of Commons. Within the budget, Mr Sunak laid out the Governments tax and spending strategy for 2021. It detailed how they would continue to help businesses throughout COVID-19, how they plan to rebuild the economy and detailed a number of tax measures meant to get public finances back into shape. Also included were Government spending plans ranging from things such as health and education, the arts & sports, businesses, digital and science to alcohol, tobacco and fuel, the environment & transport and nations and regions. With COVID-19 wreaking havoc with many businesses, jobs and finances, the budget was scrutinised like never before as Britain aims to repair itself post-pandemic. Reeves Independent has studied the Budget set out by the Chancellor in order to bring our clients the most relevant areas of significance to their financial planning.
One of the changes set out was an increase to the Personal income tax allowance – the amount you earn before you start paying income tax. The allowance will rise from £12,500 to £12,570 from April 2021. The higher rate tax threshold also increased from £50,000 to £50,270. Both thresholds will remain at this level until April 2026. A minor increase - now followed by a long-freeze - means that, over the next few years, we can expect the cost of goods to increase faster than our own tax-free earnings.
There were no other changes to the Dividend Tax rates, Personal Savings Allowance, National Insurance brackets or the Capital Gains Tax threshold.
PERSONAL LIFETIME ALLOWANCE
There is to be no change in the Lifetime Allowance for pensions (currently £1,073,100). In addition, a five-year freeze until 2025/26 will apply. The Lifetime Allowance had been expected to rise in line with Consumer Price Index (CPI) every year, and indeed has done recently. Nevertheless, a five-year freeze means the Lifetime Allowance will be substantially lower by 2025/26 than it otherwise might have been.
This has a significant impact on those whose pension benefits are greater than this limit. They could find themselves paying a greater amount in Lifetime Allowance Tax if they are to crystallise their entire pension savings before the 2025/26 tax year.
PENSION & ISA
There are to be no changes to the Pension and ISA Annual Allowances. These will remain at £40,000 and £20,000 respectively. Similarly, the Junior ISA Allowance remains at £9,000 and the Lifetime ISA Allowance remains at £4,000. The rules on pension annual allowance tapering are also not changing at this time. The only alteration was one that was expected, as the State Pension will increase from £175.20 per week to £179.60 per week for 2021/22.
The inheritance tax nil rate bands remain the same, with a £325,000 nil rate band and a £175,000 additional nil rate band when leaving a main residence to a direct descendant.
The amount that can be gifted from one’s estate with no inheritance tax concerns remains at £3,000pa.
The Budget revealed that there was to be a change in Corporation Tax, with a 6% increase from 19% to 25%, although this will not take place until April 2023. In April 2023, Corporation Tax on company profits is to rise from 19% to 25%. A change of this magnitude means that allowable expenses, such as pension contributions are all the more attractive to those operating their own limited companies. The potential tax reliefs on offer cannot be ignored.
The Chancellor also revealed that there was to be 95% mortgage guarantee for first time buyers, meaning that those looking to purchase their first property can do so with a deposit as low as 5%. This is enabled by the fact that lenders can offer loans up to 95% of the property.
At Reeves Independent, we have been advising younger clients on saving to purchase their first home. This involves the use of powerful savings vehicles such as the Lifetime ISA.
In addition, the Stamp Duty holiday has also been extended until the end of June, as the chancellor looks to turn ‘Generation Rent into Generation Buy’. The nil rate band will continue to be £500,000 for the period July 8, 2020 to June 30, 2021, meaning a rate of 0% stamp duty on purchases up to this amount.
From July 1, 2021 until September 30, 2021, the nil rate band will be £250,000. The nil rate band will return to the standard level of £125,000 from October 1, 2021. This is a unique opportunity for first time buyers and repeat buyers alike. We would encourage people to take advantage of these measures while they last! As a mortgage is secured against your home, it may be repossessed if you do not keep up the mortgage repayment.
In conclusion, almost everybody will feel the effects of this year’s budget in some way shape or form. We would encourage anyone who is left unsure to get in touch with us to make sure your financial planning is still on track.