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Budget 2021 Commentary: Private Client/Personal Tax

The point at which someone pays 40% Income Tax will have only increased by £6,395 in 15 years

Nimesh Shah, CEO

“With the confirmation that the personal allowance and higher rate threshold will be frozen until April 2026, the point at which someone pays 40% Income Tax will have only increased by £6,395 in 15 years (or just over £400 per year). With the effect of wage inflation, more people and families than ever will be dragged into 40% taxation.

“In 2010/11 (the first tax year of the Coalition Government), the basic rate tax band was £37,400 and the personal allowance was only £6,475. A person would need to earn over £43,875 before they paid Income Tax at 40% i.e. personal allowance of £6,475 plus the basic rate tax band of £37,400. With the freezing of the personal allowance and higher rate threshold (remaining the same for the third tax year in a row), a person starts to pay Income Tax at 40% on earnings over £50,270.

“The Coalition Government also introduced the ‘High Income Child Benefit’ charge in January 2013, which affects individuals who have income over £50,000. For every £100 of extra income over £50,000, you repay 1% of the Child Benefit payments, until you reach £60,000 when the Child Benefit payments are completely clawed back. It’s important to note that the High Income Child Benefit threshold at £50,000 has not increased since its introduction in 2013.

“Take the following example of a typical family of two children where only one parent works, earning £62,000, comparing their position in 2010/11 and 2021/22, their net income will have increased by only £24 over the 10-year period.

Tax year 2010/11 Tax year 2021/22
Income Tax £6,475 personal allowance

£37,400 at 20% = £7,480

£18,125 at 40% = £7,250

 

Total income tax = £14,730

£12,570 personal allowance

£37,700 at 20% = £7,540

£11,730 at 40% = £4,692

 

Total income tax = £12,232

National Insurance (NI) £5,720 – £43,888 at 11% = £4,198

£18,112 at 1% = £181

 

Total National Insurance = £4,379

 

£9,516 – £50,024 at 12% = £4,861

£11,976 at 2% = £240

 

Total National Insurance = £5,101

Total tax and NI £19,109 £17,333
Child Benefit payments received £1,752 NIL
Net £44,643 £44,667

 

* Note that the above calculations assume National Insurance thresholds for 2021/22 remain the same as for 2020/21.

“Despite the speculation, there was no mention from the Chancellor, Rishi Sunak, in relation to an increase to Capital Gains Tax. The Chancellor confirmed the Capital Gains annual exemption will be frozen until April 2026. Interestingly, the proposal by the Office of Tax Simplification was to cut the annual exemption (currently £12,300) to between £2,000 and £4,000. It remains to be seen whether the Chancellor will revisit the wider proposals to increase the Capital Gains Tax rate and possibly align it to Income Tax. For now, entrepreneurs will be relieved to see that the rate has remain unchanged – it was 12 months ago that Rishi Sunak, in his first Budget statement, hit entrepreneurs with a £900,000 tax increase through the reduction of the Entrepreneurs’ Relief lifetime allowance to £1 million. In my view, it’s vital that the UK has an attractive entrepreneurial tax regime and Capital Gains Tax sits equally alongside any corporate tax measures to encourage business.”

Tax threshold freeze will cost taxpayers over £8bn a year by 2025

Robert Pullen, Partner

“The Chancellor deciding to freeze the personal allowance and basic rate band for the next five years will incur a charge of £8,180m per year by 2025-26. While this will mean an individual’s net pay remains unaffected by tax, the corroding effect of inflation over the next five years will be left to run rampant.

“More individuals than ever before will find themselves paying tax or suffering higher rates of tax.

“This also ignores the effect that keeping the child benefit clawback threshold (at £50,000) and the personal allowance restriction (at £100,000) fixed will have on those impacted. This is a tax increase by another name and when compounded over five years, will be a very costly one for the average taxpayer.”

Must be worth the investment!

Fiona Fernie, Partner

“As of 15 February 2021, the furlough scheme had cost £53.8 billion. If Jim Harra, HM Revenue & Custom’s (HMRC) First Permanent Secretary and Chief Executive, is correct that 5% to 10% of claims are fraudulent – that means an amount which should be recovered of 2.69bn to 5.38bn. If the new task force costing £100m has approaching a 50% success rate on the lower end of that estimate then the investment will be repaid at least 10 fold even ignoring interest and penalties. This must be worth the investment!”

What about entrepreneurs?

Milan Pandya, Head of Audit, Assurance & Advisory

“While a lot has been done to support business and households, what about entrepreneurs?  They are the engine room of the economy with the risk they take in setting up and growing businesses. The Chancellor has missed the opportunity to make entrepreneurs a focal point of the economic recovery.

“In order to incentivise the entrepreneur community to participate fully in supporting the economic recovery, he should have reinstated the Business Asset Disposal Relief (previously known as Entrepreneurs’ Relief) lifetime limit to £10m.”

Personal tax allowance freeze penalises certain groups more than others

Robert Salter, Senior Advisor

“The Government’s decision to freeze the personal tax allowance and tax bands from April 2022 until 2026 represents a clear tax rise for all taxpayers over the coming years. Moreover, whilst the Government claims that such a change is proportionate and fair to all taxpayers, the reality is that it appears to penalise certain groups more heavily than others.”

“Those families in receipt of child benefit, where one partner earns over £50,000 a year are liable to the Higher Income Child Benefit Charge (HICBC) will be particularly penalised. The scheme can result in marginal tax rates for impacted families often suffering effective tax rates of 70% or more, with the exact tax rate depending, for example, on the number of children that a family has. Moreover, the HICBC income limits have not changed since the system was introduced in 2013 and this results in excessive tax charges for people who are simply not in any meaningful sense of the world ‘rich’ or ‘well-off’.”

More individuals than ever before will find themselves paying tax or suffering higher rates of tax.

Capital gains tax and Inheritance Tax reform kicked into the long grass

Robert Pullen, Partner

“Big statements were made in the Budget, but it was notable for the silence on rumoured increased to Capital Gains Tax and Inheritance Tax reform. Hardly any mention at all was made on these two taxes beyond freezing the respective exemption thresholds (with the Inheritance Tax threshold now remaining at £325,000 since April 2009).

“While the Chancellor backing down was almost inevitable following Lockdown 3, the rumours will not go away and all eyes will now be on a future Budget, possibly in the Autumn, for any increases as measures are taken to try to peg back the huge deficit.

Decision to freeze lifetime pension allowance from 2022 a punitive step

Robert Salter, Senior Advisor

“The decision to freeze the lifetime pension allowance from 2022 appears to be a punitive step which punishes todays workers (our pension savers), while existing pensioners appear to remain protected via the pensions ‘triple lock’.

“While the absolute tax saving from this measure would appear quite limited, it could have a real impact on long-term pension savings and may actually encourage those people (e.g., NHS consultants) on attractive defined benefit pension schemes to retire earlier than they would otherwise do, so that they can avoid the punitive 25% surcharge tax associated with pension savings in excess of the lifetime allowance threshold.

“If the Government is serious about ensuring that the tax burden is shared equitably across the population, it should have let the lifetime and annual pension allowances increase in line with inflation, while removing the triple lock which guarantees above inflation pension rises for existing pensioners.”

Investors Relief escapes cut

Robert Pullen, Partner

“In the Budget last year, Entrepreneurs Relief – the tax relief for business owners who sell their business by providing a 10% tax rate (now called Business Asset Disposal Relief), was severely cut from £10m to £1m, representing an increase of up to £900,000 in tax for an owner of a business who decides to sell. The equivalent relief for passive investors, also £10m, was left unchanged.

“At the time, this was thought to be an anomaly but, in the Budget today, Investors Relief has continued unaffected. This means that a passive investor who meets the criteria can sell shares up to £10m paying £1m in tax, while an entrepreneur who sells their business for the same amount would pay £1.9m – almost double.

“It is good to see that investors in qualifying trading businesses are being encouraged with tax reliefs, but hugely disappointing that the active business owners, who arguably risk much more to start the business from scratch, are not given the same tax reliefs. This should be fair, and Business Asset Disposal Relief should be restored to a £10m lifetime allowance to encourage more businesses to be set up, stimulating the economy and generating other tax reliefs such as payroll and National Insurance Contributions (NIC).”

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