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Budget 2021: what it means for you

Investment & Wealth Advice




Clare Munro, Senior Tax Adviser

Many of the trailed changes regarding CGT and income tax didn’t materialise in the Budget, but with stealth taxes on the way, financial planning and tax advice will be ever more crucial. Clare Munro, Senior Tax Adviser, takes a look at the key highlights and what they may mean for you.

It’s easy to see why Chancellor Rishi Sunak’s Budget generated more advance speculative column inches and website comment than most in living memory. You didn’t need to be an economist to appreciate the epic scale of the government’s fiscal support package and wonder where the money was coming from.

Stamp duty reprieve

Early on in his Budget speech Mr Sunak confirmed that the spending taps will remain open for a while yet. In a bid to keep the housing market sustained over the summer, he has extended the stamp duty holiday that cut the rate of stamp duty to 0 per cent for all properties up to £500,000 until 30 June 2021. Stamp duty then reduces to £250,000 until the end of September 2021 before reverting to normal levels thereafter.

By stealth: CGT, IHT & Pension Tax freeze

The Chancellor got back to more natural Conservative territory once he began to talk about sustainable public financing. His first tactic in the battle to keep a lid on public borrowing was to freeze tax thresholds, so we will see allowances rise in 2021/22 as expected, after which they will be frozen until 2026.
 
Arguably ‘tax increases by stealth’, this form of fiscal drag means that people pay more as their income increases. He is using this technique to freeze not just income tax thresholds but also those for IHT, CGT and the pensions lifetime allowance. The lifetime allowance puts a cap on the level of tax-advantaged savings available to an individual, after which penal tax charges may arise when benefits are taken.
 
The lifetime allowance freeze potentially raises issues for those contemplating filing for fixed protection to fix their lifetime allowance at £1.25m, albeit at a cost of making no further contributions to their scheme. Where annual increases at inflation might have caught up with the enhanced £1.25m allowance over a few years, that possibility now goes, making an election a more attractive prospect.

Corporation Tax hike

Mr Sunak’s second device was to increase corporation tax to 25 per cent from 2023. A 6 per cent jump from the current 19 per cent, this is expected to raise £17bn annually by 2026. Companies with small profits below £50,000 are protected with a 19 per cent tax rate and, rather than having a cliff edge at £50,000, there will be a tapering of the rates up to 25 per cent between profit levels of £50,000 and £250,000.
 
Veteran company bosses may remember the fiddly marginal relief calculations that used to be a feature of corporate tax computations before the small and large companies’ rates were unified from 1 April 2015; it seems we will be turning the clock back to revisit those days.
 
The increased corporation tax rate will reduce companies’ after tax profits, reducing the amount available to pay dividends to investors. It will likely mean a rethink for owner managed businesses too, many of whom keep their tax burden low by taking advantage of a combination of low corporation tax rates and low dividend tax rates. The common profit extraction method of small salary/larger dividend may no longer be optimal.

The devil will be in the Tax Day detail

In many ways the items that weren’t affected by the Budget were of more significance than those that were. Alignment of CGT and income tax rates was trailed as a possibility, not least because it featured as a recommendation by the Office of Tax Simplification in November last year.
 
With the potential to raise £14bn revenue, this must have been tempting, albeit not without consequences for property and investment markets. Similarly, despite reports by the Office of Tax Simplification and an All-Party Parliamentary Group recommending changes to IHT, the Chancellor left well alone.
 
However, there may still be more to come. Whereas the government would normally publish any new consultations with the Budget, this year documents and consultations will be published on 23 March, now known as ‘Tax Day’. We’re told that none of these announcements will affect the government’s finances or the next Finance Bill, so we do, at least, have an element of certainty on tax for the next 12 months. Longer term may be a different matter.

How Weatherbys can help

Many of us wondered how the Chancellor was proposing to pay for a ‘whatever it takes’ support package and now we have at least part of the answer. For private clients that answer is rather better than feared or even expected, but with COVID-19 still making headline news and calls for an overhaul of capital taxes, it would be premature to say that the tax system has been fixed.
 
The stealth taxes will mean that more people will potentially get drawn into paying more in tax, increasing the need for financial planning and tax advice.
 
It may be prudent for people approaching the pensions lifetime allowance limit to review their pension plans. Protection of funds up to £1.25m is still possible if contributions cease. Understanding where your fund sits in relation to the lifetime allowance may help you to avoid unexpected charges and allow you to continue to save tax efficiently.
 
It also makes sense to use your ISA allowance to shelter your investments and savings from tax. Every financial year, everyone is able to invest £20,000 in an ISA wrapper, with the result that income on that investment is tax free. You can’t carry the allowance forward, so if you haven’t made the most of your allowance this year, you may want to talk to your Private Banker before the 5 April deadline.

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Tax laws are subject to change and taxation will vary depending on individual circumstances. The value of an investment and its income can both increase and decrease and you may not get back the full amount originally invested.

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