Budget 2021 - The calm before the storm for individuals
by Peter Ball, partner at Smith & Williamson in Bristol
Given the focus in this Budget on tackling Coronavirus by protecting jobs and focusing on economic recovery, the tax changes for individuals were largely limited to freezing specific allowances and tax bands until 2026.
We know that a number of consultation papers will be published later this month, however, so it is possible there may yet be further changes to come.
Starting with what was announced, the Government stuck with its manifesto pledge not to increase income tax, national insurance, or VAT, although they have announced a freezing of several allowances and exemptions:
The income tax personal allowance and the basic rate limit will both increase with the Consumer Price Index from 6 April 2021, as previously committed to, but they will then be frozen until 5 April 2026, which will be after the next General Election
The capital gains annual exempt amount, which is £12,300 for individuals, will remain at its current level until 5 April 2026
The pensions lifetime allowance will remain at its current level of £1,073,100 until 5 April 2026
The inheritance tax nil-rate band and residence nil-rate band thresholds will remain at £325,000 and £125,000 respectively until 5 April 2026. By 2026, the nil-rate band will have been frozen at £325,000 for 16 years.
These four changes are forecast to bring in £21.2 billion in additional taxes through to 2026, partly because more taxpayers will start exceeding their personal allowance or become higher rate taxpayers.
Focusing then on what wasn’t announced, there was mounting speculation in the run up to the Budget that the rate of capital gains tax could be increased, potentially being aligned with income tax rates. There was no mention of this in the Budget.
Other than an extension to the social investment tax relief scheme, there were also no changes announced to the tax reliefs available to individuals when they invest in businesses, including the Enterprise Investment Scheme, the Seed Enterprise Investment Scheme and the lesser known Investors’ Relief, thereby encouraging individuals to invest for growth.
Several of the announcements made in this Budget were very similar to the recommendations included in the Treasury Committee’s report on Tax after Coronavirus, published on 24 February 2021. That report’s recommendations included not raising tax rates now, freezing thresholds, a three-year carry back for trading losses incurred in the pandemic, and increasing investment allowances for businesses. Those four measures were all introduced in this Budget.
In the past, Government consultation papers have often been released on Budget day, providing an insight into potential future tax changes. This year, the consultations are being released later, on 23 March. These consultations could point to the possibility of tax changes being announced later in an Autumn Statement, when the economy should be on a more even keel. It may be worth revisiting the recommendations in the Tax after Coronavirus report that weren’t included in this Budget for an indication of what further changes we might see. The Treasury Committee report noting that public finances are not on a sustainable trajectory, and that tax rises will be needed.
The Treasury report recommended a full reform of pension tax relief, on the grounds that it is skewed to higher earners, stamp duty land tax reform, and a reform of capital taxes, referring to the Office of Tax Simplification reports on inheritance tax and capital gains tax.
We have also had recent reports from the Institute for Fiscal Studies on the potential use of a wealth tax to deal with the cost of Coronavirus.
As expected, there was no mention of a wealth tax in this Budget, although it will be interesting to find out more about the direction of travel with tax policy when the consultations are released later this month. We may well see more fundamental changes to personal taxes in the near future.
