Market Deeping accountants outline what the Government's personal tax freeze announcement means for your business
Matthew Upex, from Market Deeping based accountancy firm Moore Thompson, writes his regular column.
The Government has announced that intends to freeze personal tax allowances between April 2022 and April 2026.
Several personal tax thresholds will increase according to the CPI (Consumer Price Index) rate for the 2021-22 financial year and will then be frozen until April 2026, while others will remain at their current rates for the next five years.
Income tax is one of the areas that will increase in line with the CPI before being frozen, alongside national insurance contributions. This means that the personal allowance has reached £12,570 in April 2021 and will then remain unchanged until 2026.
Similarly, the income tax higher rate threshold has risen to £50,270 and will now remain frozen until April 2026. This is likely to mean that most taxpayers will see incremental rises in the amount of tax they pay each year.
When it comes to pensions, the pensions lifetime allowance will not grow according to September 2020’s CPI rate of 0.5 per cent but will now remain at its current level of £1,073,100 until April 2026.
Meanwhile, the annual pensions allowance will also remain frozen at £40,000 for the next five years. This may make it harder for some taxpayers to benefit from making tax-free contributions to their pension pot to reduce their overall tax bill.
The capital gains tax annual exempt amount will also 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.
The freeze will also affect the main and residence inheritance tax nil-rate band, which will remain at current levels (£325,000 per person for the main nil-rate band and £175,000 for the residence nil-rate band). The residence nil-band taper will also continue to start at £2m.
Initially, this change may only seem small, but when you consider the accumulated loss of tax savings from the incremental changes to these personal tax allowances each year it is clear to see that by 2026 many of us will be paying much more tax.
It is important that business owners, directors and investors consider this personal tax freeze and take steps now to ensure their finances and plans remain tax-efficient. If you would like tax advice in light of these changes, please speak to our experienced team.