The Autumn budget has been delivered by chancellor Rishi Sunak and a key area he focused on on was investment in public services and infrastructure. But lets take a closer look at announcements relating to taxations, including Inheritance (IHT), Allowances, ISAs and Pensions.
Personal / NI Tax
When it comes to personal allowances Sunak was true to his word, by making no changes to the personal tax allowances, which he announced in March 2021 would be frozen for 5 years. The personal allowance is the amount you can earn each year without paying tax. Therefore, the allowances remain at £12,570, while the higher rate tax threshold remains £50,270. With the cost of living increasing, along with national wage, this may result in more people falling into the higher rate and additional rate income tax bands, and potentially seeing their personal allowance tapered downwards once their adjusted income exceeds £100,000.00.
Moving on to National Insurance, and a first ever is on the horizon come April 2023, with working pensioners having to pay 1.25% in NI on their earned income. In addition to this it was announced that the rate of NI for employees and self employed will increase by 1.25% by April 2023. The reason for this is to help fund health and social care costs.
Dividend tax is set to rise in April 2022, however, this was already known following an announcement in September. For basic rate tax payers the rate will now be 8.75%, 33.7% for higher rate and 39.35% for additional tax payers. Unfortunately for those who run their own business’s the dividend allowance hasn’t been increased and remains at £2,000.00. This is the amount of dividends you can extract from your business or investment without paying tax. These changes are expected to raise approx. £600m for the treasury.
Capital Gain Tax
Leading up to the budget announcement there were rumours capital gains tax (CGT) could see a big spike, to fall in line with income tax rates. This would’ve resulted in higher rate tax payers having to pay 40% on any gain over any beyond the annual capital gain allowance of £12,300 (which has been frozen until March 2026). Fortunately, the chancellor made no changes and therefore CGT remains 10% and 20%, or 18% and 28% on properties which aren’t the main home.
Pension Tax Relief & Annual Allowance
Sunak announced no changes in terms of Pension tax relief. This remains at 20% for basic rate tax payers, whilst higher rate and additional rate tax payers will continue to benefit from tax relief up to 40% and 45%. The annual pension allowance remains unchanged. This is the amount of money you can pay into your pension whilst claiming tax relief. The rules allow up to 100% of taxable earnings or £40,000, whichever is lower, however, in certain circumstances you may be able to put more than £40,000 in by utilising the carry forward rule. On the flip side, those with high incomes may see their annual allowance tapered downwards.
Pension Lifetime Allowance
This is the total amount you can save into your pension before incurring tax charges once the funds have been crystallised over the limit. This means any capital withdrawn from your pot above the threshold will incur a 55% tax charge if drawn as a lump sum, whilst a 25% tax charge will incur should capital be drawn as income. The current limit is £1,073,100 which the chancellor confirmed will be unchanged, and will in fact remain frozen until 2026. There was a time where this limit was £1,800,000 from 2010 to 2012. Since then it gradually decreased to a low of £1,000,000 in 2016.
The chancellor announced no changes here, The annual ISA limit will remain at £20,000.00 per person for the following tax year, whilst the limit on Junior (JISA) remains £9,000.00. Investments held inside an ISA wrapper avoid any tax consequences in terms of income, dividends & capital gains tax.
Inheritance Tax (IHT)
As expected there are no changes here. The threshold remains at £325,000 per person which can be boosted by the Residential nil rate band (RNRB) which remains at £175,000. However, the RNRB only applies to those who pass on property to their direct descendants. This means a married couple will remain to have a household IHT threshold of £1,000,000.00.
Written by Raffaele Castaldo DipFA PETR, IFA at Beesure Ltd