The Chancellor was able to, at least politically, maintain the Conservative promise of not increasing income tax, by increasing the personal allowance from £12,500 to £12,570 from 6 April 2021, and also increase the rate at which individuals pay 40% tax (32.5% for dividends) to £50,270. The highest tax rate of 45% (38.1% for dividends) will remain at £150,000. However, these thresholds have been frozen until 5 April 2026, meaning that there will be an increase in tax take, in real terms, over the coming years.
As the upper earnings limit for national insurance is aligned to the income tax higher rate, then this too will rise to £50,270 and be frozen at that level until 5 April 2026. The primary threshold, being the starting point at which the employed and self-employed pay national insurance, will rise to £9,568, as had previously been announced.
Capital taxes
‘Frozen’ appears to be a common expression for taxation of individuals in this Budget. The annual exemption from capital gains tax (currently £12,300), will remain at that level until at least 2025/26. Inheritance tax follows the same policy, remaining at £325,000 for the nil rate band and £175,000 for the residence nil rate band, until at least 5 April 2026. Whilst there will also be an increase in taxation, in real terms, by the tax-free allowances being frozen, as there had been speculation by some of a raid on capital taxes, the fact this is the only measure announced will be welcomed by many.
Pension funds and investments
The lifetime allowance is the maximum amount that an individual can have across all pension savings, with amounts above this taxed at punitive rates. The lifetime allowance is currently at £1,073,100 and it will be frozen at this level until 5 April 2026.
ISA and Junior ISA contribution limits have been frozen at their current annual amounts of £20,000 and £9,000 respectively.
Penalty easement
Parliament confirmed HMRC’s stance that penalties will be waived for late filing of tax returns, provided they were filed on or before 28 February 2021.