BUDGET 2021 – WHAT IT MEANS FOR YOUR FINANCES
This article explores the major changes announced in the Budget of 3rd March 2021, and in particular the effect on your personal finances. This article refers to the position in England & Wales.
Click the video below to listen to Dan Woodruff and Sadie Nine discuss the recent budget on BBC Essex radio.
- Income tax increases via frozen thresholds
- Large rise in corporation tax
- Minor changes to pension Lifetime Allowance, capital gains tax and Inheritance tax
Budget 2021 summary
In short, there were no major changes announced in the Budget 2021, at least from a personal finance perspective.
There were no changes to the main rates of income tax. However, tax has been increased by freezing the personal allowance, and other thresholds. This means that more of your future income will be taxable, and the amount of income tax you pay is likely to rise.
Previously, income tax bands were due to rise in line with the Consumers Price Index (CPI). The 2021 Budget confirmed that the personal allowance of £12,500 will rise to £12,570 in 2021/22. Income greater than this band will be taxed at 20%, until a total of £50,270 from 2021/22. These tax bands will not rise until at least 2025/26. This means that any increase in income due to inflation will be taxed more.
You are likely to pay more income tax from April 2022.
A large increase in corporation tax was announced from April 2023. Currently, company profits are taxed at 19%. From April 2023 the starting rate for corporation tax will be 19%, but only for companies with profits below £50,000. There will be a tapered rate of corporation tax for profits between £50,000 and £250,000. Company profits above £250,000 will be taxed at a much greater rate of 25%.
If you run a Limited Company, you are likely to pay more corporation tax. Company directors should consider the effect of the increased tax rates on your overall income strategy, as paying yourself via a low salary and dividends may not be as tax-efficient as previously.
As companies will pay greater corporation tax, this is likely to reduce profits and therefore could impact dividends. This may affect investment returns, particularly in income portfolios.
Capital gains tax
The annual exemption of £12,300 for individuals, and £6,150 for trusts will be frozen until April 2026. This is a minor change, but could mean that you pay more capital gains tax on profits above these allowances. Capital gains tax applies to sales or disposals of investments, properties, and other assets.
We will need to take account of this change when we assess changes to your taxable investments, or when you take lump sum withdrawals.
The Inheritance tax Nil Rate Band will be frozen at £325,000 until April 2026. The Residential Nil Rate Band will also be frozen at £175,000 until the same date.
The fact that these allowances will not rise means that more people will pay Inheritance Tax on death. As assets rise in value, more estates will be caught by Inheritance Tax.
The pensions Lifetime Allowance will be frozen at £1,073,100 until April 2026. The Lifetime Allowance was due to rise in line with CPI each tax year. Effectively, this means that more pensions will be caught by potential Lifetime Allowance tax charges.
There were no changes to pension tax relief and annual allowances.
This change will mean that more savers will be affected by the Lifetime Allowance, meaning potential additional tax charges in the future.
Previously-announced changes to contractors’ tax status will now go ahead, as these were delayed as a result of the Coronavirus crisis. This means that contractors are much more likely to be treated and taxed as employees.
Contractors will probably pay more income tax and National Insurance as a result of being treated as employees.
The stamp duty holiday was extended to 30th June 2021. This means that property purchases will not attract any stamp duty on properties under £500,000, provided that the sale completes before the end of June 2021. Purchases above £500,000 will pay stamp duty in the usual way, but have an effective reduction for the value up to £500,000. This reduces stamp duty on the purchase by up to £15,000.
From July until end of September 2021 the starting rate for stamp duty will be at £250,000.
This change will help any buyers currently working towards completion of the transaction before the end of June. In the short term, this change could increase house prices as buyers rush to complete deals, and supply is limited.
The support for businesses and the self-employed has been extended. The various schemes will be in place until September 2021, including Furlough and the self-employed grants system.
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About Dan Woodruff
Certified Financial Planner & Chartered Wealth Manager at Woodruff Financial Planning
Financial Planning helps you to navigate and anticipate significant life changes. I want to help you to ensure your money is managed wisely to give you the financial security that will fund the future and lifestyle that is important to you.