Personal Tax Allowance frozen
The chancellor’s announcement of a freeze in the personal tax allowance has been viewed as a stealth tax by many. Whilst the unchanged threshold for income tax may not be felt in people’s pockets immediately, it will undoubtedly mean that over the course of the five-year freeze, more people will pay more tax.
How will this affect my income?
The 20 per cent basic rate tax threshold will rise fractionally from £12,500 to £12,570 in April but will remain frozen there until 2026. Similarly, the 40 per cent higher-rate band will rise by £70 to £50,270 and will stay there until 2026.
In previous years, these income tax thresholds have increased annually with inflation, meaning that as peoples wages rose, so their tax burden also kept pace, and the latest announcement will mean that an employee’s personal tax allowance will cover proportionately less of their pay. The Scrutton Bland Private Client team have calculated that if these thresholds had increased with inflation, the tax payable by a Higher Rate taxpayer would have been reduced by just over £1,000 per annum by 2025/2026.
This “stealth tax” will drag about 1.3 million people into the tax system at the basic threshold, and a further 1 million people into the higher-rate bracket. Some forecasts predict that the Treasury will raise an additional £8.2 billion by 2025/26.
In his speech, Mr Sunak said: “Nobody’s take home pay will be less than it is now, as a result of this policy. But I want to be clear with all Members that this policy does remove the incremental benefit created had thresholds continued to increase with inflation. We are not hiding it, I am here, explaining it to the House and it is in the Budget document in black and white. It is a tax policy that is progressive and fair.”
Pensions Lifetime Allowance
Wealthier savers may also suffer a further blow as the amount they can save into their pensions before incurring punitive charges is also frozen until April 2026. The threshold will remain at £1,073,100 after which point a 25 per cent charge is levied on any monies drawn as income (plus income tax on withdrawals), or 55 per cent charge if taken as a lump sum.
And whilst a £1 million pension pot may sound like a lot, when broken down over several decades of a career, it is less of a tax on the super-rich and more something that the wealthier middle classes will need to bear in mind when drawing down income from their pension.
The amount of your estate that you can pass on tax-free to someone other than your partner or spouse has also been frozen at £325,000 for the next five years, meaning that as the value of houses and estates continue to rise, more people will pay additional tax, and it will be the Treasury who benefits.
What can you do?
At Scrutton Bland our aim is to help ensure that our clients and their families get the best financial outcome from their efforts. We do this by providing clear and effective advice to help you maximise your wealth and make informed tax planning decisions.
Whether you are a business owner or private individual, making informed decisions and utilising the allowances available to you can make a dramatic difference to your wealth in the long-term. With tax and financial planning specialists working together on your behalf, the first step on this long-term relationship is to get in touch to arrange a free, confidential consultation at a time that works for you.