Chancellor of the Exchequer Rishi Sunak has unveiled the UK’s budget for 2021-22.
There had been speculation about the introduction of a wealth tax, increasing tax rate bands and/or reforms to capital gains tax (CGT) following HM Treasury ordering a review of the system last summer.
But Sunak was more gentle in his approach to paying off the country’s Covid-19 debt – currently at around £407bn.
Some personal tax thresholds will increase according to CPI rates for the 2021-22 financial year and then be frozen until April 2026, while others will remain at their current rates for the next five years.
“This budget is not the time to set detailed fiscal rules,” Sunak said while presenting the plans to the house of commons.
Wealth tax by another name
While the UK did not introduce a wealth tax, per se, to mitigate the huge level of borrowing it was forced to take to front the impact of the pandemic; Becky O’Connor (pictured), head of pensions and savings at Interactive Investors, believes the move will have a similar effect.
“Freezing allowances is a back-handed way of raising taxes, as wage inflation and asset price inflation increase the number of people pushed over the thresholds at which they have to pay more tax,” she said.
“The chancellor has avoided overtly-named wealth taxes by making these changes to existing allowances, which will result in higher tax bills for an increasing number of people who build up assets – whether that’s in pensions or property values, in the next five years.
“The issue coming down the line is that what hits today’s wealthy could hit normal earners and diligent investors in future decades.”
Lifetime Allowance
As was widely reported in the UK press at the weekend, the pensions LTA will not grow according to September 2020’s CPI rate – a mere 0.5% – but will remain at its current level of £1,073,100 until April 2026.
John Westwood, founder and group managing director of Blacktower Financial Management, told Portfolio Adviser sister title International Adviser: “Rishi Sunak has announced a stealth tax on pension pots by freezing the lifetime allowance.
“This will throw the wealthiest pension pots into the tax net and impacts thousands of pension savers for years to come. We believe now is the wrong time for this due to the personal finance pressures already prevalent as a result of the pandemic.
“The government will need to provide extra clarity on the inflation link and how long the freeze will last, so pension savers can save with confidence in the future.”
Dave Downie, technical manager at Standard Life, said that while the measure will affect a small pool of people to begin with, it has the danger of spreading out to ordinary pension savers.
“For someone seeking to keep their drawdown income withdrawals at a sustainable level to last maybe 30 years and take into account inflation, a withdrawal of around 3% provides an annual income of around £32,200 before tax,” he said.
“So, this isn’t something that will only affect the highest of earners and a prolonged period of no inflationary increases will quickly reduce that income in real terms and could further affect confidence in pensions.
“But it is important to remember that the LTA isn’t a ceiling on what can be saved into pensions. There are many good reasons for those potentially impacted to continue saving into their pension especially if stopping funding means losing out contributions from their employer.”
Look beyond pensions
Keith Richards, chief executive of the Personal Finance Society, said: “Covid-19 has highlighted how important it is to incentivise people to set cash aside to protect them from future financial shocks. By freezing the personal tax thresholds and pension lifetime allowance the government is failing to encourage people to save cash for a rainy day and to fund their later life.”
That is why Alex Davies, chief executive of Wealth Club, believes that the decision to freeze the LTA for five years will inevitably push people to look elsewhere to secure a sustainable retirement income in the future.
“The freeze in the pension lifetime allowance is the latest blow for an increasingly large swathe of better off pension investors,” he said. “It further confirms they need to look beyond pensions to build a large retirement pot.
“So, we expect to see even more investors turning to venture capital trusts (VCTs) and enterprise investment schemes (EIS). Whilst not quite as tax efficient as pensions and riskier; for more experienced investors they are a very sensible option.
“But there is more. By and large, with pension investments, you are just trading large company shares with other investors. When you invest in VCTs and EIS, you’re pumping new money into young and innovative businesses which should create lots of jobs and economic growth. So, this could be better news for the government and the economy, especially if we want to grow our way out of the crisis.”
Income tax, CGT and IHT
Other allowances have also been affected by the budget.
The IHT nil-rate bands will remain at current levels until April 2026. The nil-rate band will stay at £325,000 and the residence nil-rate band at £175,000.
The residence nil-band taper will also continue to start at £2m.
Income tax is one of the few that will see an increase according to CPI before being frozen, alongside national insurance contributions. The personal allowance will reach £12,570 from April 2021 and will remain unchanged for five years.
The income tax higher rate threshold will rise to £50,270 from next month until April 2026 as well.
The CGT annual exempt amount (AEA) will remain at £12,300 for the next five years for individuals, personal representatives, and some types of trusts, but for most trusts the limit will be £6,150, although HM Treasury documents did not specify which kind.
Les Cameron, head of technical at Prudential UK, said: “As we know from the Office of Tax Simplification’s CGT review, the freeze on the CGT allowance won’t really affect the mainstream investor who will simply amend withdrawals to remain within the allowance. It will probably see business owners and property investors paying more tax.
“The good news on the IHT nil-rate band freeze is that there are many straightforward and simple solutions to ensure people only pay the amount of IHT they want to pay.
“The increase in the tax bands and national insurance rates will see a modest increase in take home pay for all. This will broadly be between £22 to £50 for next year. However, the freeze on future inflationary increases will see more people move into higher rates of taxation through pay-rises between now and 2026.”
Green retail savings product
One of the novelties in Sunak’s budget is the introduction of a retail savings bond that “will support green projects” across the UK, he explained.
The product will be accessible via National Savings & Investment (NS&I) from the summer. It will be “closely linked to the UK’s sovereign green bond framework and will give all UK savers the opportunity to take part in the collective effort to tackle climate change”, the Treasury said.
Gemma Woodward, director of responsible investment at Quilter Cheviot, said: “Up to now, the government’s climate policy has been a case of style over substance. We’ve had grand proclamations and brief 10-point plans, but nothing more.
“Actions speak louder than words and with the clock ticking to [the United Nations Climate Change Conference (COP26)] later in the year, and demands to build back better growing ever stronger, we are finally seeing action from the government to take us a step further on the journey to net zero.
“The chancellor today unveiled new sovereign green savings bonds, which solve the dual purpose of allowing retail investors to buy into the green agenda, while providing an outlet for the ‘accidental’ savings build up by households during the pandemic.
“Ultimately, any measure which allows people to connect their own finances to the green economy and which broadens retail investor access to a diverse array of green products is welcome.
“However, the million-pound question is how much will be raised from retail investors through the green savings bond? Will it actually make a difference to efforts to achieve net zero? Perhaps not on their own, but accompanied with green gilts for the institutional market, which will also be launched this year, they could make a difference.
“And the success will depend on whether the money is eventually spent on truly green projects, and how the government will measure and report impact to savers.”
Rachel Springall, finance expert at Moneyfacts, expects the product to become very popular as “NS&I is a trusted brand” and “interest rates sit at record lows”, so savers will consider “other ways to invest their cash”.
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