In his Budget last month, chancellor Rishi Sunak avoided huge tax rises but did freeze many allowances in his bid to claw back the government’s coronavirus overspend. In the next five years – as wages, inflation, and house prices rise – these freezes could see your tax bill increase.

Here are some of the changes announced in the Budget, how they could affect the amount of tax you pay over the next few years, and how Expert Wealth can help you mitigate the impact.

1. The Lifetime Allowance (LTA)

You could face a higher tax bill as you accumulate pension wealth.

The LTA had been expected to rise in the Budget. The planned increase, in line with the consumer price index (CPI), would have seen it reach £1,078,900. Instead, it will be frozen at its current level of £1,073,100 until at least 2026.

The six-year freeze is effectively a “stealth tax”, expected to generate additional tax income of £80 million in 2021/2022, rising to £300 million in 2025/26. Cumulatively, the measure could raise £1 billion in revenue.

Exceeding the LTA will leave you liable for an LTA charge on the excess. If you take the additional amount as income, it will be taxed at 25%. Taking the excess as a lump sum, however, will result in a charge of 55%.

If you are already close to the current LTA or expect to be by the time you retire, you’ll need to be aware of the frozen limit.

Over the next six years, as wages rise and the economy recovers, £1,073,100 could look increasingly ungenerous. It could provide a defined contribution (DC) pension of just £30,000 per year according to Hargreaves Lansdown’s pension calculator.

2. Income Tax

An increase to the Personal Allowance has gone ahead for the 2021/22 tax year, for basic- and higher-rate taxpayers. This is the amount you can earn without paying Income Tax.

For basic-rate taxpayers, the allowance has increased from £12,500 to £12,570. For those paying the higher rate, the allowance has increased to £50,270. The rises in thresholds fall below expected wage rises for this year.

As wages continue to grow over the next five years, increasing numbers of people will find themselves paying higher taxes.

In fact, by 2024, a total of 1.6 million people could be pushed into the higher tax bracket, raising around £6 billion for the Exchequer. According to Citywire, the cumulative total for the next five years could be more than £19 billion.

For additional-rate taxpayers, the threshold has been frozen at £150,000 since 2010.

3. Inheritance Tax (IHT)

Tax and allowance freezes could also affect your estate planning.

The freeze to the IHT threshold and the “residence nil-rate band” – staying at £325,000 and £175,000 respectively – will also raise additional tax revenue.

As house prices, wages, and the values of investments grow, many will find themselves liable to IHT on death.

The £325,000 exemption has remained unchanged since 2009. A rise in line with inflation over the same period would have seen it stand at £450,000 today.

4. Stamp Duty Land Tax

Movers and homebuyers are also set to pay more tax over the next five years.

The Stamp Duty holiday introduced during the pandemic has been well publicised, as has its extension.

Before the arrival of the Stamp Duty holiday, the duty was payable on homes sold for £125,000 and above in England and Northern Ireland. First-time buyers paid on homes sold for more than £300,000.

The threshold was raised to £500,000 last year. Originally intended to cease on 31st March 2021, it has since been extended to the end of June. From July, the threshold will reduce to £250,000.

The nil-rate band returns to its pre-pandemic level of £125,000 from October.

5. Capital Gains Tax (CGT)

The Capital Gains Tax (CGT) allowance is frozen at £12,300.

It is anticipated that the freeze will raise £65 million in tax over the next five years. This is bad news if you own a second home, but also for any investments you hold.

How financial planning can help mitigate the impact of the freezes

If you are concerned about the Budget’s tax freezes, speak to us now.

At Expert Wealth, we take a holistic view of your finances, using our expertise and experience to help put a plan in place that is right for you.

You might find increasing pension contributions, or paying into a child’s pension, helps manage Income Tax and IHT. Upping ISA contributions to the annual limit of £20,000 could help you take maximum advantage of the tax efficiencies they offer.

Remember that a financial plan, aligned to your goals, is designed for the long term. It can ride the waves of market uncertainty and regulatory change. If your aspirations haven’t changed it is unlikely your financial plan will need to either.

Get in touch

Please get in touch if you’d like to discuss any aspect of your long-term financial plans including managing your pension and investments in the most tax-efficient way.

Please note

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.