NFU Mutual Chartered Financial Planner Sean McCann explains what the 2021 Spring Budget means for you.
Rishi Sunak’s Budget focussed on the Government’s ongoing response to Coronavirus, but there were also a number of important announcements that could affect your personal finances.
Here’s a summary of the key points:
The amount of tax free income most can enjoy will increase to £12,570 from April this year, with the 40% Income tax threshold increasing to £50,270. However, there was a sting in the tail, with the Chancellor announcing that these would remain frozen at these levels until April 2026.
As incomes increase over time, it’s likely that a growing number of people will be caught in the 40% Income tax net. It’s important to take advantage of the tax breaks available including Pension and ISA allowances.
Despite predictions that the many tax advantages of pensions would be trimmed back, they were left largely untouched.
The most significant change was the decision to freeze the Lifetime allowance (the amount you can hold in pensions without paying a tax charge) at its current level of £1,073,100 until April 2026.
If you think you may be impacted by the change, it’s important to take advice.
Pensions remain one of the most tax efficient ways to invest. In addition to tax relief on what you pay in, any growth is free of UK Income tax and Capital Gains tax. Anything left in your fund on death is normally free of Inheritance tax.
The Chancellor left ISA allowances unchanged at £20,000 for a standard ISA and £9,000 for the Junior ISA. Any growth within an ISA remains free of UK income tax and Capital Gains tax.
While no major changes were made, the Chancellor did announce that the standard tax free amount of £325,000 and the ‘residence nil rate band’ of £175,000 would remain frozen at current levels until April 2026.
The standard tax free amount has remained unchanged since April 2009. The Office of Tax Simplification has made a number of recommendations on reforming Inheritance tax that the Chancellor may have under review.
Capital Gains tax
There were no new announcements, other than the decision to freeze the tax free exemption at its current level of £12,300 until April 2026.
One of the most significant announcements was the plan to increase Corporation tax rates from 19% to 25% on profits over £250,000 from April 2023. Profits up to £50,000 will continue to be taxed at 19% with tapered rates between £50,000 and £250,000.
Company Investment incentive
Companies investing in qualifying plant and machinery between 1 April 2021 and 31 March 2023 will get a 130% first year Capital allowance, allowing companies to cut their tax bill by up to £25 for every £100 spent.
How did the markets react?
As is the way with most recent political announcements much of the budget detail had been drip fed out in advance, so financial markets knew more or less what to expect. Rishi Sunak’s speech, based on OBR forecasts, generally painted a picture of an economy improving at a faster pace than previously expected with further pent up demand set to be released. Nonetheless short-term support measures were extended and near term borrowing and gilt issuance will remain high. These effects combined to push gilt yields higher on the day.
UK equities will have also welcomed the economic growth forecasts and the housebuilding sector rose as further fuel was added to the housing market mini-boom. Longer-term freezes in tax allowances and the planned hike in Corporation tax from 2023 may temper enthusiasm, but near term economic growth will likely have the greater sway with investors.
Beyond the headlines it was interesting to see the Bank of England’s remit changed to explicitly include environmental sustainability and confirmation that the UK will issue “Green Gilts” for the first time this year. Environmental and sustainability factors are likewise increasingly important in NFU Mutual’s investment decision making.