Why the tax freezes announced in the Budget could leave you and your family worse off

It seems hard to believe that Covid-19 has gripped the world for more than a year. 12 months ago, chancellor Rishi Sunak delivered his first Budget, announcing a £30 billion package to help Britain deal with the pandemic.

At the time it was a noticeable sum. However, the amount paled into insignificance over the following year as the chancellor spent a further £280 billion to keep Britain financially afloat, leaving many to wonder how he was going to rebuild public finances in this year’s Budget.

Although some tax rises were rumoured but didn’t materialise, the chancellor did freeze several tax allowances and exemptions until 2026. Many have dubbed the move a “stealth tax”, as households will be worse off in real terms over the next five years, creating billions of pounds in revenue for the government.

Read on to learn about four tax freezes, what they could mean for you and your family, and how they could affect your day-to-day finances and long-term plans.

1. Personal Allowance

One of the chancellor’s biggest announcements was to freeze the Personal Allowance, which is the amount you can earn before you are subject to Income Tax.

While it will rise from its current level of £12,500 to £12,570 this April, it will remain at that level until 2026. The threshold for higher-rate taxpayers who pay 40% Income Tax will rise from £50,000 to £50,270 this April, then remain at that level until 2026.

Typically, the Personal Allowance rises annually in line with inflation to help maintain spending power. So, the fact it will not means you’re more likely to pay tax or an increased amount of tax.  Over the next five years, if your income rises alongside inflation, you’ll find you’re worse off in real terms.

According to the BBC, the Office of Budget Responsibility has claimed the freeze will result in 1.3 million more people paying Income Tax than if the allowance increased, and 1 million will move into the higher-rate tax band.

As the below graph shows, the move will raise an additional £20 billion for the government, resulting in many dubbing it a “stealth tax”.

Source: BBC

2. Capital Gains Tax

This is a tax you pay when you sell something that has gone up in value, including personal possessions (excluding your car) worth more than £6,000 and property that is not your main home.

Despite speculation the chancellor would increase the rate of Capital Gains Tax (CGT), he decided not to do so, meaning that CGT remains at 10% or 20% (18% or 28% for property) depending on your income.

However, the chancellor froze the CGT allowance, which will remain at £12,300 until 2026. This is the amount of profit you can make when disposing of assets before CGT is due.

As assets rise in value, the CGT allowance will stay the same. This increases the chances of you having to pay CGT on gains, potentially raising millions of pounds for government coffers. If you’re selling assets, it means it’s more important than ever to be aware of the allowances and potential tax liability. In some cases, it can make sense to spread the disposal of assets over several tax years to make full use of the CGT allowance.

3. Pension Lifetime Allowance

Another major announcement during the Budget was the pension Lifetime Allowance being frozen at £1,073,100 until 2026. This is the amount someone can tax-efficiently save within their pension. Exceeding this threshold could mean you will face an additional tax of up to 55% when you take an income or lump sum from your pension. It may mean your pension savings won’t go as far as you thought.

Pension savers nearing the Lifetime Allowance will need to take care. As pension investments continue to grow you could exceed the threshold, even if your contributions stop. Those with a final salary pension, including public sector workers, could also be affected by the freeze.

According to the Telegraph, a report by Royal London predicts more than a million non-retired people could breach the allowance.

The Treasury estimates freezing the Lifetime Allowance will provide the government with £80 million in the next tax year, rising to £300 million in 2025/26.

4. Inheritance Tax

Currently, the nil-rate band – the total value your assets can reach before potentially being liable for Inheritance Tax (IHT) – is £325,000.

Many people can also use the residence nil-rate band if they leave their main home to children or grandchildren, which stands at £175,000 per person. As a result, most people can leave an estate worth £500,000 (£1 million as a couple) without having to pay IHT.

Both the nil-rate band and residence nil-rate band will be frozen at their current levels until 2026.

If property prices and the value of other assets continue to rise, the freeze could result in many more estates becoming liable for IHT. This is backed up by the Treasury, which estimates that the move could raise £15 million more for the government next year, increasing to £445 million by 2026. With a standard IHT rate of 40%, exceeding the nil-rate bands could mean you leave significantly less to loved ones.

We can help you and your family plan for IHT. There are many ways an IHT bill can be reduced, so please contact us to discuss your estate.

Contact us

A professional financial planner can help ensure you are as tax-efficient as possible and create a strategy that is tailored to help you reach your financial aspirations. We’re also here to help you review your long-term financial plan in light of the Budget freezes.

We are here to create solutions that are individual to you, so please get in touch if you have any questions or would like to discuss your financial situation.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The Financial Conduct Authority does not regulate tax and estate planning. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.

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