Five tax changes in the Budget and how they will affect your finances

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LOTS of the biggest changes in this year’s budget were to the tax system – but how will they impact your finances?

The chancellor announced several stealth raids on people’s income, with the most impactful being a five-year freeze on income tax allowances and thresholds.

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NINTCHDBPICT000639434858-2Credit: AFP or licensors

In total, the changes could end up costing tax payers thousands of pounds.

Here we explain each of the new tax rules what they mean, and how hard they are likely to hit your wallet.

Income tax allowance

One of the biggest announcements in Rishi Sunak’s budget was that the tax-free personal allowance will be frozen.

This allowance is the amount of money you can earn before you have to pay any income tax.

At the moment the allowance is set at £12,500, but it is due to rise to £12,570 from April this year.

That increase will go ahead, but then the allowance will be held for the next five years.

At the same time, the government has frozen the threshold at which people pay higher rate tax.

This is currently £50,000 and will be rising to £50,270 from April. This threshold will then stay the same until 2026.

Mr Sunak said: “Nobody’s take home pay will be less than it is now, as a result of this policy.”

But realistically an income allowance tax freeze works as an effective pay cut when you take inflation into account.

Inflation means that the cost of the things we buy gets more expensive each year. Often, pay also rises in line with this.

When the personal allowance stays the same, this means that more low earners will be nudged into paying income tax.

Meanwhile everyone else will miss out on the take home pay increase that had previously been promised.

More people will also be pushed into higher rate tax-payer status. This can have knock-on impacts in other areas such as child benefit.

The Government had previously set out plans for the thresholds to increase in line with inflation.

This would have taken the personal allowance to £13,310 and the higher rate tax threshold to £53,410 by the end of 2024.

That means that millions of workers who earn more than £12,500 will end up paying more tax.

What is the Budget?

THE Budget is when the government outlines its plans for tax hikes, cuts and things like changes to the minimum wage.

It’s different to the Spending Review, which sets out how much public cash will go towards funding certain departments, devolved government’s and services, such as the NHS.

The Budget is read out in the House of Commons by the Chancellor of the Exchequer. It will be Rishi Sunak’s second Budget as Chancellor.

Mr Sunak’s first one in March last year has been dubbed the “coronavirus Budget” after it focused on supporting Brits financially through the crisis, rather than the government’s “levelling up” agenda as promised in the 2019 general election.

Normally, the Budget is held once a year but the unprecedented circumstances of the pandemic in 2020 saw Mr Sunak give a “mini-budget” in the Commons on July 8.

For instance, anyone earning more than £13,310 in 2024 will need to pay at least £148 more than expected.

As the freeze will continue for two more years beyond 2024, the unexpected tax spend will be even higher.

The hold on higher rate tax payers will impact anyone who earns over £50,270.

For instance, someone who earns over £53,410 in 2024 will find they are paying £1,256 extra in tax as a result of the higher rate threshold.

This is on top of the £148 due to the personal threshold freeze, meaning an extra tax bill of £1,404 in 2024.

Inheritance tax

Inheritance tax thresholds are also being held at their current levels for the next five years.

Currently, an individual can pass on £325,000 of their wealth tax-free to their loved ones.

There is also a £175,000 allowance for a main home, giving an individual £500,000 in total.

Families have to pay 40% inheritance tax on anything above this.

This means that more households that likely to be hit by the tax – for instance if property prices rise.

Pensions lifetime allowance

Rishi Sunak has also announced that the pensions lifetime allowance will be frozen as part of his Spring budget.

The current allowance is £1,073,100 and was expected to rise in line with inflation – but now it will be held until April 2026.

The freeze penalises savers who sacrifice more of their salary to retirement savings or whose pension investments perform particularly well.

If your savings across all of your pots exceeds the threshold then you will be hit with a hefty tax charge.

This is most likely to harm public sector workers such as doctors or senior teachers as well as higher earners in the private sector.

What are the pension allowances

THERE are two allowances which set how much you can pay into your pension pot without being taxed

Annual allowance

The first allowance is the annual allowance, which currently stands are £40,000 per year.

This is the maximum amount that you can save into your pension in a year before you get penalised with tax.

It covers all your pension pots including personal, workplace and final salary schemes.

You might have a lower annual allowance if you have already flexibly accessed your pension pot or if you are a higher earner.

If you bust the allowance you’ll need to fill in a self-assessment form and pay a bill.

Lifetime allowance

The Lifetime allowance is currently £1,073,100. This is the maximum you can save in all your pensions combined without paying a tax charge.

If you’re in more than one pension scheme, you must add up what you’ve got saved in all of them to see how close you are to the limit.

You’ll get a statement from your pension provider telling you how much tax you owe if you go above your lifetime allowance. The tax will be deducted before you start getting your pension.

The rate of tax you pay on pension savings above your lifetime allowance depends on how the money is paid to you – the rate is:

55% if you get it as a lump sum
25% if you get it any other way, for example pension payments or cash withdrawals

Capital Gains Tax

The thresholds for paying Capital Gains Tax will also stay at the current rate until April 2026.

This is the tax that you pay when you sell something that has gone up in value.

It applies to personal possessions worth £6,000 or more, property that is not your main residence and investments that are not wrapped in pensions or ISAs.

At the moment the threshold is £12,300 for individuals, personal representatives and some types of trusts and £6,150 for most trusts.

You then have to pay tax on any gains above that threshold. As it has been frozen for the next five years, more people are likely to be hit.

Corporation tax

The final tax grab announced by the government was an increase in corporation tax from 19% to 25%.

The Chancellor said the rate will be raised from 19% from April 2023 as he looks to plug the huge black hole in the country’s pandemic-ravaged finances.

This will affect anyone who has set up their own business – including self-employed company directors.

Firms with profits of £50,000 or less would still only have to pay 19% under what Mr Sunak called a Small Profits Rate.

Coronavirus help for the self-employed

HERE’S a round-up of the main coronavirus government schemes for the self-employed:

As part of the raid on companies the VAT registration threshold also remains frozen at £85,000.

Rachael Griffin, tax and financial planning expert at Quilter, said: “Politically, the Chancellor doesn’t want to be seen to be increasing taxes, or reducing any allowances, in this economic environment.

“One stealthy way of avoiding these fiscal constraints is to raise tax by the back door by freezing personal tax thresholds, the pensions lifetime allowance and the annual exempt amount for CGT.

“So for now, Sunak has started a fiscal ice age by freezing the tax rate thresholds.”