5 key takeaways from the 2021 Budget and what they mean for you

Back in March 2020, Rishi Sunak’s first Budget as chancellor outlined a package of coronavirus support measures costing an estimated £30 billion.

Fast-forward a year, and government spending to shore up the economy in the wake of the pandemic will shortly exceed £300 billion. In his second Budget speech, the chancellor walked a fine line between continuing to support individuals and businesses through the crisis, while also taking his first steps to plugging the black hole in the public purse.

Here are five key takeaways from the Budget and what they mean for you.

1. Personal tax freezes are a “stealth tax”

While the chancellor may have been able to meet his manifesto commitment that he wouldn’t raise Income Tax or National Insurance contributions (NICs), he did scrap a planned rise in both the Personal Allowance and higher-rate tax thresholds.

From 6 April 2021, the level at which you start paying Income Tax will rise from £12,500 to £12,570 and the level at which you pay the higher rate of tax will rise from £50,000 to £50,270.

These will then be frozen until 2026 rather than rising every year during this parliament as previously planned.

This freeze means that, if your earnings rise over the next few years – perhaps by the cost of living or more – you’ll end up paying more tax than you would have if the allowances had risen in line with inflation.

It’s a clever way to raise revenue as you don’t lose any income; instead, you don’t get as much as you otherwise would have.

2. ISA allowances remain generous

In the small print of Rishi Sunak’s speech, the government confirmed that the ISA allowances would remain at the same levels in the 2021/22 tax year. This means you can contribute:

• £20,000 to an adult ISA
• £9,000 to a Junior ISA or Child Trust Fund.

The £4,000 annual Lifetime ISA limit also remains (this forms part of your overall £20,000 ISA subscription limit).

If you have a child or grandchild under the age of 18 you can save or invest up to £29,000 in the 2021/22 tax year and benefit from tax-efficient returns.

3. Government support remains until September

One of the more unexpected announcements the chancellor made was to extend the Job Retention (“furlough”) scheme until September 2021.

The government will cover the wages for workers who have been put on leave due to the pandemic (up to a maximum of £2,500 a month) at the following rates:

• 80% until the end of June 2021
• 70% in July 2021
• 60% in August and September 2021.

Employers will have to pay 10% of wages in July and 20% in August and September.

Sunak also announced that the fourth Self-Employed Income Support Scheme (SEISS) grant for February, March, and April 2021 will cover 80% of monthly profits up to a maximum of £2,500 a month.

He also confirmed that people who became self-employed in the 2019/20 tax year, and have filed a 2019/20 tax return, will also be eligible for the fourth and fifth grants. This will benefit around 600,000 workers.

A fifth grant, covering May, June and July 2021 will also be available and the amount will depend on how seriously the pandemic has affected turnover.

• Self-employed workers whose turnover has fallen by 30% or more will continue to receive 80% of monthly profits up to £2,500 a month.
• Self-employed workers whose turnover has fallen by less than 30% will receive 30% of monthly profits up to £2,500 a month.

The chancellor also outlined a range of support measures for the retail, hospitality, and leisure sectors. Non-essential retail businesses will receive grants of up to £6,000 per premises, while hospitality and leisure businesses will receive grants of up to £18,000.

There will also be an extension to the temporary 100% business rates relief for hospitality, retail, and leisure until the end of June with a two-thirds discount on rates for the rest of 2021.

The chancellor also extended the temporary VAT reduction in these sectors from 20% to 5% until 30 September following which there will be an interim 12.5% VAT rate until April 2022.

4. Freezes to tax allowances and exemptions are a wealth tax in all but name

The chancellor announced he was freezing three significant tax allowances and exemptions until 2026:

• The Lifetime Allowance – the amount you can save into a pension before incurring tax charges – will remain at £1,073,100.
• The Inheritance Tax (IHT) threshold will remain at £325,000 with the “residence nil-rate band” at £175,000.
• The annual Capital Gains Tax (CGT) exemption will remain at £12,300.

These are also stealth taxes because, while they may not affect many people immediately, thousands will be impacted in real terms as time goes on.

For example, if your pension savings grow over the next five years and exceed the Lifetime Allowance amount, you could face a levy of up to 55% on any additional lump sums or income taken from your pension pot.

Further, as the value of assets such as house prices and investments rises over the next five years, the CGT and IHT freeze will see more people face a tax liability, raising additional revenue for the Exchequer.

If you’re worried about paying too much tax, taking professional financial advice can be hugely beneficial.

5. If you run a business, it’s time to invest

As with many Budgets, it’s often the case that the chancellor giveth with one hand, and taketh away with the other. So, while the rate of Corporation Tax might rise by six points in 2023, he did announce “the biggest business tax cut in modern British history”.

A new “super-deduction” will come into force on 1 April 2021 and last until 31 March 2023. This means that, when companies invest, they can reduce their tax bill by 130% of the cost of the investment.

Sunak gave the example of a firm currently spending £10 million on equipment. At present they benefit from a £2.6 million tax reduction but, under the super-deduction they would get a tax break worth £13 million.

The Office for Budget Responsibility estimates it could boost business investment by 10%.

Get in touch

Freezes on allowances and tax exemptions could have a significant knock-on effect on your finances in the coming years. To find out how we can help you, please get in touch. Email enquiries@blackswanfp.co.uk or contact your adviser on 020 3828 8100.

Please note

This blog is for general information only and does not constitute advice. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation which is subject to change.

The information is aimed at retail clients only.