The Chancellor, Rishi Sunak, has delivered his annual Budget for 2021, including major updates to employment, as well as to business, capital and personal taxes.
In this article, we will take you through everything you need to know about Personal Taxes following the 2021 Budget.
Personal Allowance Updates
The personal allowance is currently £12,500. Budget 2018 announced that the allowance would remain at the same level until 2020/21 and the statutory provision to increase the allowance annually by CPI was to be overridden. The Chancellor has confirmed that the personal allowance will increase by CPI (0.5%) for 2021/22 to £12,570.
There is a reduction in the personal allowance for those with 'adjusted net income' over £100,000. The reduction is £1 for every £2 of income above £100,000. So for the current tax year there is no personal allowance where adjusted net income exceeds £125,000.
For 2021/22 there will be no personal allowance where adjusted net income exceeds £125,140.
The Chancellor announced that the personal allowance will be frozen at £12,570 for the tax years 2022/23 to 2025/26.
Marriage Allowance
The marriage allowance permits certain couples, where neither pays tax at more than the basic rate, to transfer 10% of their personal allowance to their spouse or civil partner.
Comment
The marriage allowance reduces the recipient's tax bill by up to approximately £250 a year. The marriage allowance was first introduced for 2015/16 and there are couples who are entitled to claim but have not yet done so. It is possible to claim for all years back to 2016/17 where the entitlement conditions are met. The total tax saving for all years up until 2020/21 could be over £1,000. A claim for 2016/17 will need to be made by 5 April 2021.
Tax Bands & Rates
The basic rate of tax is 20%. In 2020/21 the band of income taxable at this rate is £37,500 so that the threshold at which the 40% band applies is £50,000 for those who are entitled to the full personal allowance.
The Chancellor announced that for 2021/22 the basic rate band will be £37,700 so that the threshold at which the 40% band applies will be £50,270 for those who are entitled to the full personal allowance.
The Chancellor announced that the basic rate band will be frozen at £37,700 for the tax years 2022/23 to 2025/26. The National Insurance contributions Upper Earnings Limit and Upper Profits Limit will remain aligned to the higher rate threshold at £50,270 for these years.
Individuals pay tax at 45% on their income over £150,000.
Different rates and thresholds apply for taxpayers resident in Scotland.
Tax on savings income
Savings income is income such as bank and building society interest.
The Savings Allowance applies to savings income and the available allowance in a tax year depends on the individual's marginal rate of income tax. Broadly, individuals taxed at up to the basic rate of tax have an allowance of £1,000. For higher rate taxpayers the allowance is £500. No allowance is due to additional rate taxpayers.
Some individuals qualify for a 0% starting rate of tax on savings income up to £5,000. However, the rate is not available if taxable non-savings income (broadly earnings, pensions, trading profits and property income, less allocated allowances and reliefs) exceeds £5,000.
Tax on dividends
The first £2,000 of dividends is chargeable to tax at 0% (the Dividend Allowance). Dividends received above the allowance are taxed at the following rates:
- 5% for basic rate taxpayers
- 5% for higher rate taxpayers
- 1% for additional rate taxpayers.
Dividends within the allowance still count towards an individual's basic or higher rate band and so may affect the rate of tax paid on dividends above the Dividend Allowance.
To determine which tax band dividends fall into, dividends are treated as the last type of income to be taxed.
Universal Credit
Universal Credit is a single payment that is made up of different amounts depending on an individual's circumstances. There is no entitlement if an individual's capital is worth more than £16,000. Shortly after the 2020 Budget the Chancellor announced an increase in the Universal Credit standard allowance by £20 per week for one year.
The government is extending the temporary £20 per week increase for a further six months.
Working Tax Credit
The government is making a one-off payment of £500 to eligible Working Tax Credit claimants to provide extra support over the next six months.
Mortgage guarantee scheme
The government will introduce a new mortgage guarantee scheme in April 2021. This scheme will provide a guarantee to lenders across the UK who offer mortgages to people with a deposit of 5% on homes with a value of up to £600,000.
Under the scheme, all buyers will have the opportunity to fix their initial mortgage interest rate for at least five years should they wish to. The scheme, which will be available for new mortgages up to 31 December 2022, is designed to increase the availability of mortgages on new or existing properties for those with small deposits.
Green National Savings and Investments (NS&I) product
The government will offer a green retail savings product through NS&I in the summer of 2021. This product will be closely linked to the UK's sovereign green bond framework and will give all UK savers the opportunity to take part in the collective effort to tackle climate change. The green gilt framework, to be published in June, will detail the types of expenditure that will be financed to meet the government's green objectives.
Venture Capital Schemes: extension of the Social Investment Tax Relief
The government will continue to support social enterprises that are seeking growth investment by extending the operation of Social Investment Tax Relief to April 2023. This will continue the availability of income tax relief and capital gains tax hold-over relief for investors in qualifying social enterprises.
Pensions Lifetime Allowance
The lifetime limit sets the maximum figure for tax-relieved savings that an individual can build up over their lifetime.
Legislation will be introduced to remove the annual link to the CPI increase for the next five years. This will maintain the standard Lifetime Allowance at £1,073,100 for tax years 2021/22 to 2025/26.
Speak to us today for advice on Personal Taxes
The tax team at Shorts is always on hand to offer qualified, insightful advice that is tailored to you and your personal circumstances. If you would like to find out exactly how the 2021 Budget will impact your Personal Taxes, or any other taxes you are eligible to pay, get in touch with our team today.
Read more about the 2021 Budget
Shorts is dedicated to bringing you the most relevant budget analysis with detail and clarity. For more information on each of the key areas of the 2021 Budget, you can explore our other blogs below.
Scott Burkinshaw
Scott is Tax Partner at Shorts, specialising in providing strategic corporate and personal tax advice.
View my articlesTags: Budget 2021
