Merry New (Tax) Year!

April 12, 2021
Posted in Tax
April 12, 2021 Dale Kirkpatrick

Now that it’s April, we are now into a new tax year. It’s not as popular as the 1st January new year, or the Chinese new year, but this is arguably the one which affects everyone the most. Some things have changed, but lots haven’t – so here’s the lowdown.

*(Quick question first – from what film was the title taken from? Answer at the end )

 

Income Tax

The good news is that your personal allowance increased this year with inflation –  by just over a massive 0.5%. This is the amount of money you are allowed to earn in the year on which you don’t pay any income tax. This increased from £12,500 to £12,570 (or £1,048 per month). Don’t spend that extra tax free £70 all at once! In reality, this will only benefit you by the tax no longer due on that £70 which would be a massive £14! Seriously – don’t spend it all at once.

You’ll pay basic rate tax at 20% on everything you earn between £12,570 and £50,270, and then higher rate tax at 40% on income between £50,270 – £150,000, and additional rate tax over and above that at 45% .

It’s not all good news though, because they have frozen these thresholds for the next 5 years until 2026, so if you’re lucky enough to be in a job which has guaranteed pay rises, you will actually pay more tax.

Call me ungrateful, but for my own brain, I kind of wish they could have stuck with the nice round numbers of £12,500 and £50,000.

 

Stealth Tax

Keeping these thresholds and allowances the same for a while is a way to increase the amount of tax being paid over time.  Wages will rise but as the thresholds and allowances are staying the same, it means that more tax will be paid.  This is what is known as a stealth tax – you may have heard about it on the news.  More stealth tax news to follow!

 

High Income Child Benefit Tax Charge

For those families with children who are claiming child benefit, something which might affect them is the high income child benefit tax charge.  It kicks in after you (or your partner) start earning over £50k. For every £100 you earn over £50,000, you have to pay back 1% of the child benefit you received. Therefore, if you earn over £60k, you have to pay it all back.

The unfair part, in my eyes, is that this applies if only one parent earns over £50k. So, if a husband and wife are claiming benefit and both earn £50k – which is a combined household income of £100k gross – they are fully entitled to child benefit. However, if one earns £60k, and the other doesn’t earn anything – so they have a combined household gross income of £60k – there is no entitlement to child benefit.

This isn’t new, but what is new, is that this could actually affect basic rate taxpayers for the first time! There doesn’t seem to have been any update on the £50k threshold for this, and so with new Tax Bands, you may be a basic rate tax payer and still need to repay child benefit should you earn between £50,100 and £50,270.  Did someone say Stealth Tax?

 

ISA

No changes here.

For another year, they have frozen the ISA allowance at £20,000. This is the amount an individual can pay into their Individual Savings Account(s) in total in the tax year. It has been set at £20k since April 2017. This is a “use it or lose it” allowance, and so make sure to use as much of it as you can. As ISAs grow free of tax, whether in cash or invested, this is a valuable benefit and so if you can, try to use your ISA allowance as early as possible to start earning tax free.

Junior ISAs – saving for your children – have an allowance of £9,000, which is the same as last year as well.

Lifetime ISAs – saving for your first home or until age 60 – has stayed the same with an allowance of £4,000 which the government will add a further £1,000 on to.

These ISA allowances are also frozen until 2026.

 

Pensions

Again, not much excitement here. Your annual allowance (how much you can contribute in this tax year without taking advantage of carry forwards) remains at a maximum £40,000. However, unlike an ISA, you can carry forward any unused allowances for the last 3 years. This means that provided you have been a member of a pension scheme, the maximum pension contribution you could potentially make in this tax year is £160,000.  Please note that in order to gain tax relief on personal contributions you will need to have taxable earnings up to the amount you are contributing to the pension e.g. to contribute £100k using Carry Forward you will need to have earned income of £100k.  For information about employer contributions download our “Coffee guide to pensions”.

 

Lifetime Allowance however has been frozen at £1,073,100. This is the total amount you can have saved in a pension. This is where some people may come unstuck, as with investment return in your personal pension (defined contribution pension), or revaluation if you are lucky enough to be in a final salary (defined benefit pension), you may increase above this allowance if you were close to it last year.  The Lifetime Allowance for pensions is also frozen until 2026!  Again, another example of stealth taxation in practice!

 

State Pension

The full State Pension went up by 2.5% to a weekly pension of £179.60 (up from £175.20 per week) Two full state pensions could now pay a retired couple over £18,500 per annum, guaranteed. Bear in mind, because of the triple lock, pensioners got a 5 times inflation pay rise this year!

Capital Gains Tax

No change here. The government have frozen your capital gains allowance at £12,300 for another year. If you’re a basic rate tax payer, you’ll pay 10% or if you’re a higher rate tax payer you’ll pay 20%. If the gain is on property (not your main home) then there is an additional 8% surcharge).  Again the Capital Gains Allowance is also frozen until 2026, meaning an effective tax increase in real terms.  I’m actually going to stop pointing out these examples of stealth taxes now!

 

Inheritance Tax

No change here. Another year of frozen Nil Rate Bands (the amount on which you can pass on without paying Inheritance Tax).  These rates are also frozen until 2026.  Again as the value of your estate increases over time the likely result will be more tax paid.  Maybe if I use the word Covert instead of stealth – would that be less repetitive?

 

Summary

All in all, apart from the crafty tax increases (read stealth tax here) there is not much change from last year. I think we were all braced for increases in personal tax given the year we’ve just had, but maybe most of us weren’t expecting them to be so implicit.  The big headline changes hit business owners with Corporation Tax changes. They had the explicit tax increase from 19%, stepped up to as much as 25% if earning significant profits.

 

There are however opportunities available to business owners, especially in terms of retirement planning.  We can only work to the rules laid down but it would appear that now is a pretty good time to review your financial planning with a view to making sure that all your ducks are in a row moving forward.  Book some time to talk over your financial planning with us

 

*The answer to the question above was of course Trading Places (1983) starring Eddie Murphy & Dan Aykroyd

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