In last month’s Budget, chancellor Rishi Sunak announced several tax and allowance freezes that are set to have a significant impact over the next five years.
Whether you are saving for retirement, already retired, or a business owner, you could see your tax bill rise.
Here are the main changes announced, what they mean for your tax bill, and how Globe IFA can help you mitigate the impact.
If you are still earning
The Personal Allowance is the amount you can earn before you pay Income Tax. The chancellor raised the threshold for the 2021/22 tax year to £12,570 – an increase of £70. Sunak also raised the threshold for higher-rate taxpayers, from £50,000 to £50,270.
If you are still earning, you might see a slight increase in your take-home pay this year. However, both allowances are now frozen until 2026. The additional-rate threshold stays at £150,000.
These freezes could have a significant impact over the next five years, as the UK recovers from the economic effects of the coronavirus pandemic. As inflation rises, and your wages increase, you could find yourself liable for increased Income Tax.
It is also possible that the freeze might push you into a higher tax bracket.
The freeze is expected to raise over £8 billion by the 2025/26 tax year.
Source: BBC
If you are worried about the amount of Income Tax you might have to pay over the next five years, get in touch. We can help you manage your tax liability, possibly by contributing more to your pension.
If you are still contributing to your pension
The chancellor had been expected to raise the Lifetime Allowance (LTA) in line with the Consumer Prices Index (CPI).
The LTA is a limit on the amount you can withdraw from all the pension plans you hold without becoming liable for an LTA charge. This charge can be as high as 55% of any amount above the threshold you take as tax-free cash. The charge is 25% for funds you take as income.
Freezing the limit at its current amount of £1,073,100 for the next five years is expected to raise a further £990m by 2025/26, according to the Financial Times. Savings will be made on pension tax relief as people stop contributing to their pensions, as well as raising revenue through the LTA charge itself.
Although the £1,000,000 limit may seem generous, it was due to increase by almost £90,000 by the end of this parliament in 2024, according to figures from the Telegraph, and could have reached nearly £1.2 million by the time the freeze is due to end.
Globe’s team of independent financial advisors can help if you are worried your pension funds could approach the LTA limit within the next five years. We can help you put a financial plan in place and look at any LTA protection you may have.
If you are a business owner
As a business owner during the pandemic, you may have been struggling to make ends meet. If so, the rise to Corporation Tax announced in the Budget might have come as a further shock.
Although a rise had been predicted, the size of the increase was unexpected.
From 2023, the rate of tax your business will pay on profits is set to rise from 19% to 25%. This new rate won’t apply to all businesses, however, and a taper will also be put in place.
If your company profits are below £50,000, your rate of Corporation Tax will remain at 19%. Companies earning over £50,000 will see the rate they pay tapered, meaning that you will only pay the full rate of 25% if your profits exceed £250,000.
A 6% rise will be seen as steep by many, but the chancellor was quick to confirm that only one in ten companies will pay the new rate.
You might also find the announcement of the government’s “super-deduction” helps to counter the potential rise in the tax your business pays.
The super-deduction is an incentive for businesses to invest over the next two years, aiding in the UK’s economic recovery while benefiting from a reduction in Corporation Tax.
Invest in your company between now and 31 March 2022 and your tax bill could reduce by 130% of the cost of your investment. The deduction applies to tangible investment only, but amounts to a tax cut of 25p for every pound of investment you make.
Get in touch
Please email hello@globeifa.co.uk or call us on 020 8891 0711 to discuss the impact of the Budget’s tax changes on your financial plans.
Please note
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation, and regulation which are subject to change in the future.
