The MAM Blog – Tax Rates Frozen until 2026

Jamie McLaren – Financial Planning Director

Chancellor, Rishi Sunak, confirmed a number of tax freezes in his Spring Budget on 3 March 2021 in combination with the continued spending to assist with the impact of Covid-19.

There were a number of tax changes noted in the budget, but this article focuses on the following personal taxes that will be frozen from 6 April 2021 until 5 April 2026:

    • The Personal Allowance and Income Tax bands.

For Scottish taxpayers, it should be noted that whilst the Scottish Parliament has the power to set Income Tax rates and bands for the non-savings non-dividend income of Scottish taxpayers the Income Tax base, which includes the setting or changing of Income Tax reliefs and exemptions, and the tax-free Personal Allowance, remains reserved to the UK Parliament.

    • Inheritance Tax (IHT) nil rate bands.
    • Capital Gains Tax (CGT) annual exemption.
    • Pension Lifetime Allowance (LTA).

The UK Government has accumulated significant additional debt in its measures to deal with the Covid-19 pandemic and it is expected to take many years to recover this expenditure. Whilst freezing tax rates may on the face-of-things seem a relatively innocuous gesture, the impact will gradually increase overall tax paid without the UK Government appearing to be overly harsh or expressly increasing taxes. This approach is often referred to as ‘stealth tax’ as there have been no express or direct increases to taxation.

For example, any inflationary increases in individuals’ salaries over this five-year period will result in more of their salaries being taxed at higher income tax rates.

It is estimated that some 1.3 million people can expect to begin paying some income tax where they did not before. A further 1 million individuals are expected to become Higher Rate taxpayers by 2026.

The freezing of the pensions LTA, CGT exemption and IHT nil rate bands will not impact as many individuals as with freezing Income Tax, but the impact of the freeze is similar to that above, determined by the growth of the underlying assets subject to assessment for these taxes.

For example, if the value of pensions, investments and property do not grow significantly over the next five years, then the freezing of these taxes/exemptions will have a minimal impact on our pockets or the Treasury. Conversely, if invested funds and house prices do well over the next five years, we may see many more people being subject to these taxes as the thresholds have been frozen. Individuals already dealing with the potential of LTA, CGT and IHT taxation may find that these freezes have increased the likelihood and degree of such taxation even further.

You can find out more about the Spring Budget 2021 by clicking here.