PruAdviser on-line services will be unavailable from 20:00 pm on Friday 26 November until 6:00 am on Monday 29 November for website maintenance.
Currently we are not able to show some detailed information for Retirement Account performance for clients. This will be restored on 13 December 2021. We're sorry for any inconvenience this causes.

Spring Budget 2021 – Income Tax and Capital Gains Tax

Author Image The Technical Team
3 minutes read
Last updated on 3rd Mar 2021

Overview

As had been reported the personal allowance and higher rate threshold will increase in line with CPI from 6 April 2021. What wasn’t expected is these rates being frozen until 5 April 2026.

The dividend nil rate allowance, starting rate for savings and personal savings allowance will also remain the same for the 2021/2022 tax year but no decision was announced for future tax years.

As previously announced, and legislated for in February 2021, National Insurance Contributions (NICs) thresholds will rise with CPI from 6 April 2021.

What did the Chancellor say?

The Chancellor confirmed that from 6 April 2021 the Personal Allowance and higher rate threshold (HRT) will rise in line with CPI to £12,570 and £50,270 respectively then remain at these levels until 5 April 2026. The chancellor expects this five year freeze to raise an extra £8bn a year by 2025/26 for the Treasury.

The Personal Allowance and HRT for savings and dividend income apply across the UK. The HRT for non-savings and non-dividend income will apply to taxpayers in England, Wales, and Northern Ireland. The Scottish rates for non-savings and non-dividend income were announced on 28 January 2021 and can be found here.

No changes were announced in relation to the dividend nil rate allowance, the 0% starting rate for savings or the personal savings allowance. They will remain at the current levels which are detailed below.

  Tax year 2020/2021 Tax year 2021/2022
Dividend nil rate allowance £2,000 £2,000
Starting rate for savings £5,000 £5,000
Personal savings allowance for basic rate taxpayers £1,000 £1,000
Personal savings allowance for higher rate taxpayers* £500 £500

*Additional rate taxpayers are not entitled to the personal savings allowance

National Insurance Contributions (NICs) thresholds will rise with CPI from 6 April 2021, bringing the NICs primary threshold/lower profits limit to £9,568 and the upper earnings limit (UEL)/upper profits limit (UPL) to £50,270, in line with the income tax higher rate threshold. The UEL/UPL will then remain aligned with the higher rate threshold at £50,270 until April 2026. All other NIC thresholds will be considered and set at future fiscal events. NICs thresholds apply across the UK.

The CGT annual exempt amount (AEA) will remain at £12,300 for the next five years for individuals and personal representatives. For most trusts the limit will be £6,150.

What does it mean for financial planners?

The increase in the tax bands and national insurance rates will see a modest increase in take home pay for all. This will broadly be between £22 to £50 for next year. However, the freeze on future inflationary increases will see more people move into higher rates of taxation through pay-rises between now and 2026. 

Nothing has really changed from an income tax point of view in this budget for financial planners other than it will be a bit easier to model potential income tax liabilities for the next five tax years. Although it should be noted the dividend nil rate allowance, starting rate for savings, personal savings allowance and some other NIC thresholds have not been frozen until 5 April 2026 so there could some changes over the next five years.

For clients who may be expecting salary increases or possibly an upturn in investment/savings income then it’s an opportunity to discuss wrapper switching at the next client review. Pension contributions is the obvious go to for higher rate tax relief and for those with investment income that is not required, the income tap can be switched off by reinvesting in an insurance bond, ISA or pension. Wrapper switching to improve tax efficiency will also help demonstrate value at the client review.

As we know from the Office of Tax Simplification’s CGT review, the freeze on the CGT exemption won’t really affect the mainstream investor who will simply amend withdrawals to remain within the limit. It will probably see business owners and property investors paying more tax.

"Prudential" is a trading name of Prudential Distribution Limited. Prudential Distribution Limited is registered in Scotland. Registered Office at Craigforth, Stirling FK9 4UE. Registered number SC212640. Authorised and regulated by the Financial Conduct Authority. Prudential Distribution Limited is part of the same corporate group as the Prudential Assurance Company. The Prudential Assurance Company and Prudential Distribution Limited are direct/indirect subsidiaries of M&G plc, a company incorporated in the United Kingdom. These companies are not affiliated in any manner with Prudential Financial, Inc, a company whose principal place of business is in the United States of America or Prudential plc, an international group incorporated in the United Kingdom.