Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
The chancellor has continually promised to do “whatever it takes” to support businesses and workers through lockdown so it’s come as no surprise that both the furlough and SEIS schemes have been extended, at least for a little while.
There’s a clear change in focus from getting through to getting out, with a new £5bn scheme for small companies being labelled a ‘re-start’ grant, there’s money for the arts and a bid for the 2030 World Cup all optimistically hinting at better days to come.
From a personal finance perspective there are a number of changes to be aware of
Pension lifetime allowance frozen at £1,073,100 for the rest of this Parliament
While freezing the lifetime allowance at £1,073,100 might sound like a relatively minor move aimed at the wealthiest in society, large swathes of middle Britain are now at risk of being dragged into its net. High-earning doctors and consultants in the NHS who benefit from generous defined benefit pensions, for example, will be among those hit by this measure.
Any retirement savings over this level could be subject to a 55% tax charge if withdrawn as a lump sum or 25% if withdrawn as an income, unless savings are covered by one of the protection regimes.
Lifetime ISA exit charge set back to 25% in April
It is hugely disappointing the Chancellor didn’t use his Budget statement to, at the very least, keep the LISA early withdrawal charge at 20%.
The logic for reducing the withdrawal charge from 25% to 20% was the fact LISA holders may face income pressure as a result of the lockdown. Given millions of people will continue to face employment uncertainty in the coming months – and particularly when the furlough scheme is finally scaled back – that logic remains at least as relevant for 2021/22 as it is for 2020/21.
Income tax bands frozen
The Chancellor has reverted to a tried and tested method of increasing taxes without raising the hackles of the electorate, by freezing allowances after April this year until 2026. Usually the Treasury is a bit sneakier, bumping allowances up by inflation rather than earnings each year and keeping the difference, in a process called fiscal drag. Freezing allowances is fiscal drag on steroids and will collectively cost taxpayers £19 billion over the next five years*. It will slowly but surely mean that from 2022, millions of people will pay more income tax, without the government actually adjusting the headline rate.
The stealth tax works because while allowances stay frozen, wages rise. Assuming 4% wage growth, someone earning £41,000 today will be earning £50,000 in five years’ time, and potentially starting to pay higher rate tax. To be fair, basic taxpayers have had a pretty good run of things of late, with the personal tax-free allowance increasing from £6,475 in 2010 to £12,500 today and £12,570 from April. Higher earners weren’t treated quite as kindly, but the higher rate threshold has risen from £43,875 in 2010 to £50,000 today and £50,270 from April, an average increase of about 1.3% a year. The people who will feel the sharpest pain are those just under the thresholds, because as their earnings rise, the amount of money they take home per £1 of extra gross salary goes down significantly.
Stamp duty holiday extended
The Chancellor has kicked the can down the road on the stamp duty holiday, on the basis that some homebuyers will face a cliff edge at the end of March under current plans to withdraw the scheme. There is some justification for a temporary extension, seeing as the stamp duty holiday itself has created such a frenzy that the property industry has struggled to keep up, creating a backlog of unfulfilled demand. As any retailing executive will tell you, there’s always a week after a promotional sale when customers are miffed because they just missed out, so the extension and gradual tapering of the tax perk will create a softer landing, with less indignation all round.
Mortgage guarantee scheme
The pandemic has been particularly brutal to the financial prospects of the younger generation, who have lost their jobs in droves. A fresh mortgage guarantee scheme is a welcome boost to help first time buyers onto the property ladder, seeing as the first rung seems to be disappearing out of view. The scheme will increase the availability of 95% loan-to-value mortgage products, enabling more households to access mortgages without the need for prohibitively large deposits.
NS&I Green Bond
The new NS&I Green bonds are likely to sell like hotcakes, seeing as environmental concerns are really beginning to take hold with savers and investors. The product is expected to land in summer and the interest rate paid on the bond will be a key determinant of its success. Too low, and it won’t put bums on seats, too high and there are inevitably questions about costs to the taxpayer, as there were with George Osborne’s NS&I “Pensioner Bonds”. The green bond doesn’t form part of NS&I’s finance target for next year, which suggests the Treasury has high hopes for its popularity.
Source: HM Treasury – Budget 2021: Protecting the jobs and livelihoods of the British people
These articles are for information purposes only and are not a personal recommendation or advice. Tax treatment depends on your individual circumstances and rules may change.