The year 2021 sounds like something you might find in the title of a 1960s sci-fi movie, set a long time in the future, when people are curiously transfixed by handheld computers, and wear strange masks. Well, it’s almost upon us, so it’s a good time to think about what next year holds in store for our personal finances.

The main theme for 2021 can probably be summed up in three innocent-looking letters: TAX. The Government’s got a big black hole in its finances to fill, and we all know that means higher taxation. If vaccines start to work their magic and alleviate the health crisis, we could see the chancellor starting the fiscal repair job in the March Budget.

We don’t know precisely where the axe will fall as yet, but the Government will be looking for ways to raise tax revenues without slowing down the economy too much. Wealth is less economically active than income, so that paints a big target on its back. A capital gains tax hike looks like a front runner.

CAPITAL GAINS RAID FLOATED

The chancellor commissioned a report which recommended raising capital gains tax rates in line with income tax rates. You only have to go back to 2008 when that was already the case, so the Government would hardly be breaking any taboos by rolling back a few years to pay for the financial damage wrought by the pandemic.

There have also been murmurings around higher rate relief on pensions taxation, but then that has been a background hum for most of the last 10 years.

Cutting relief would bring in lots of money for the Treasury, but they’d basically have to tear up the fabric of the pensions system and redesign it. By the time they’ve done that we could be close to the 2024 election, or beyond. In times of such a huge strain on the public finances though, we shouldn’t entirely rule it out.

Whatever the Treasury does, savers and investors need to be on their toes when it comes to tax planning next year. Using pension and ISA allowances is a must, to shelter as much money from the taxman as possible. There’s also the Lifetime ISA and Junior ISA which might be deployed. Beyond that, if you’re a couple, consider spreading assets between both of you, to make use of both sets of allowances.

Those who are married or in a civil partnership can pass assets between themselves without incurring a capital gains liability until they are actually sold. And if inheritance tax is likely to be an issue, make sure you use your annual £3,000 gifting allowance to pass money on without being clobbered by IHT.

Aside from the rising tide of taxation, there are some specific changes that we know are happening next year that will affect investors.

PENSIONS CHANGES LOOMING

There will be a little more leeway for savers with big pensions pots as the lifetime allowance is set to rise by 0.5% to £1,078,900. This is the upper limit you can build up in a pension throughout your lifetime without paying a tax charge.

Also on the pensions front, new rules coming into effect from February 2021 will impact people who choose to keep their money invested while taking an income in retirement, in a drawdown arrangement. Pension companies will be required to offer customers four ‘pathways’ investment options.

These will not be tailored based on their personal circumstances, but rather designed around four very broad retirement income objectives.

The reforms are primarily designed to ensure savers do not end up investing large portions of their pot in cash over the long-term. The FCA is worried people who hold too much cash in their pension risk missing out on valuable investment returns, and having their pot’s real value eaten away over time by inflation.

We’ll also see the early withdrawal charge for Lifetime ISAs creep back up to 25% from April 2021. This was cut to 20% as part of emergency measures designed to ease the pain on savers struggling to make ends meet during lockdown. As with all measures introduced to cope with the pandemic, it’s worth keeping an eye out for changes to the timetable, as they could be extended if the health emergency takes a turn for the worse.

HOLIDAY TIME OVER FOR PROPERTY

At the end of March, the stamp duty holiday which has boosted the UK house prices will come to an end, and we can expect to start seeing that impact on activity in the property market. Realistically that will start to take effect over the next couple of months due to the length of time it takes to complete on a house purchase before the deadline.

As we head into the New Year, most of us will be very glad to see the back of 2020. While 2021 promises to be brighter, there are still challenges ahead, and particularly with big changes to the tax system looking likely, it will pay to keep your ear to ground.

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