Wealth Management

Autumn Budget 2021 and Spending Review

On Wednesday 27 October, the Chancellor of the Exchequer, Rishi Sunak delivered the 2021 Autumn Budget and his first five year spending review, dubbed as delivering a stronger economy for the British people.

With many of the allowances, thresholds and exemptions having been frozen for a number of years, this article looks at the Budget and changes that have been announced over the last year, covering Income Tax, the Social Care Reform (which was announced in September), Capital Gains Tax and Stamp Land Duty Tax, Investments and Pensions, Inheritance Tax, Trust and Estate taxation and Tax administration and other issues.

8th November 2021


1. Income Tax

Personal allowance

It was announced in March that the personal allowance and higher rate tax (HRT) threshold were to be frozen at £12,570 and £50,270 respectively until the end of the 2025/26 tax year.

In addition, the thresholds for losing personal allowance and child benefit, £100,000 and £50,000 respectively, were held in the Budget and these will be impacted by increasing incomes. The basic personal allowance will reduce to zero where adjusted net income is £125,140 or more, and child benefit will effectively be lost once income rises to £60,000.

Again, the impact of these allowances, thresholds and rates being unchanged for five years can be quite significant when taking into account income inflation running at quite high rates this year.

An individual with income of up to £50,000 at the end of the 2020/21 tax year will not be subject to higher rate tax and will retain all their child benefit. Should this income increase by 4% per annum for five years, their income will total £60,833 by 2025/26. As a consequence, they will have over £10,000 of income in the 40% threshold and lose entitlement to their child benefit in full. Quite a stealth tax!

An increasing income will also cause a tax consequence as long as the £100,000 threshold for losing personal allowance remains fixed.

With no changes to pension tax relief or allowances in the Autumn Budget, this does create a number of planning opportunities and making a pension contribution will be very tax efficient. A pension contribution allows you to increase your basic rate tax threshold whilst also reducing your adjusted net income for child benefit purposes and the £100,000 personal allowance threshold.

The Personal Savings Allowance & Dividend Allowance

There were no announcements regarding the Personal Savings and Dividend allowances and we therefore assume that these will continue at the same levels as for the last few years.

The Personal Savings Allowance applies as follows:

  • basic rate taxpayer, the first £1,000 of savings income will be taxed at 0%
  • higher rate taxpayer, the first £500 of savings income will be taxed at 0%
  • additional rate taxpayer, they will not receive any Personal Savings Allowance.

The Dividend Allowance applies such that the first £2,000 of dividend income is taxed at 0%.

Starting Rate

It has also been confirmed that the Starting Rate Savings Allowance will remain unchanged at £5,000 and the rate of tax on income in this band continues to be 0%.

It is worth noting that this allowance does not apply to everyone and is only relevant typically where the level of savings income, such as interest from deposit accounts, forms the majority of your income and any income from earnings, pensions or property is within your tax-free personal allowance.

Income Tax rates

The rates of Income Tax remain unchanged in line with the Government’s promise not to increase these.

The basic rate of tax remains at 20% (7.5% for dividends for the remainder of this tax year) and will apply to income in excess of the personal allowance of £12,570, up to £50,270.

Income in excess of £50,270 will be taxed at 40% (32.5% for dividends) up to the threshold of £150,000 when the additional rate of tax is 45% (38.1% for dividends).

As we will not be seeing any increases to tax free allowances for a number of years, making the most of the different allowances available will seem even more valuable, and is of particular note for couples where the overall split of income from investments can be reviewed for the purposes of tax efficiency and there is also the added potential for the Marriage Allowance.

Those with income falling between £100,000 and £125,140 are caught by an effective 60% rate of tax, making personal pension contributions and charitable Gift Aid donations an extremely effective way of retaining the entitlement to the personal allowance. Effective tax relief at 60% in the current climate is very generous.

The Marriage Allowance was introduced in April 2015 and is available where both spouses were born after 6 April 1935 and both are basic rate taxpayers. If one spouse is not fully utilising their tax-free personal allowances (including the dividend and savings allowances mentioned above), they can claim the Marriage Allowance to transfer 10% of their personal allowance to their spouse – £1,257 for the 2021-22 tax year, which would represent a tax saving for the recipient spouse at 20% of £251. It is also possible to backdate the claim for earlier years. This is a permanent election that needs to be made directly with HMRC (the claim is not initially made on a tax return). It can be cancelled in a later year if you cease to meet the criteria.


2. Social care reform

In September, the Government broke its manifesto promise for no increase to the main taxes by announcing a Social Care levy by adding 1.25% to National Insurance for employers, employees and the self-employed from April 2022. While initially this money will be earmarked for the NHS, this will be shown as a separate Levy from April 2023 and at that time those over state pension age who are still working will also be liable for the levy.

Social Care levy – increase in National Insurance

  • It will include individuals who are exempt from paying National Insurance, such as those over State pension age
  • The amount of Levy payable will therefore depend on an individual’s income for the year with examples being:
  • No Levy payable for those earning less than £8,840 and only Employer payments due for those earning less than £9,568
  • An additional £192.50 payable by someone earning £25,000
  • An additional £505 for someone earning £50,000
  • There is no levy on those paying class 3 voluntary contributions.

The Levy does again highlight the benefits that can be obtained by making use of certain salary sacrifice arrangements, such as with regards pension contributions or the implementation of share schemes to reward staff. The additional savings will make these more attractive for both Employers and Employees.

Social Care levy – increase in Dividend Tax

In addition, there will also be an increase of 1.25% in the rate of tax paid on dividends. As it is a straightforward increase in the rate of tax, it will have no impact on individuals who currently pay no tax on their dividend income, such as if the shares are held in Individual Savings Accounts or fall within the £2,000 annual dividend allowance.

The dividend ordinary rate will be set at 8.75%, the upper rate at 33.75% and the additional rate at 39.35%. The dividend trust rate will also increase to 39.35% to remain in line with the dividend additional rate. The changes will apply UK-wide and will take effect from 6 April 2022.


3. Earnings

National Insurance

The threshold for Employee National Insurance Contributions will rise from £9,568 from April 2022, although the actual figure has not yet been confirmed but is likely to rise by September inflation which is 3.1%. The Upper Earnings Threshold will remain at £50,270 in line with the Income Tax higher rate threshold and will be held at this level until April 2026.


4. Capital Gains Tax (CGT)

The CGT annual exempt amount for individuals will remain at the current rate of £12,300 from April 2021 to April 2026. The rates of CGT remain unchanged.

The annual exemption is given on a ‘use it or lose it’ basis. Remember this exemption is per individual, so where assets are owned jointly, there will be two annual exempt amounts available to use against the total gain (if either party has not made any other taxable gains during the year).

Losses incurred in previous years can also potentially be offset against gains.

Perhaps we should also consider what the Chancellor did not say… It is widely acknowledged that CGT rates remain at an historic low and have been for some years now. The Government has committed not to increase Income Tax, however this does not extend to CGT and whilst there were no changes this time, with a need to ‘fix’ the finances following record borrowing, perhaps next time CGT rates will be on the list.

The Office of Tax Simplification (OTS) report on CGT alongside its similar report on Inheritance Tax (IHT) was published in 2019, with the main motivation being improving the current systems to make them fairer as well as simpler. But the Government will perhaps now be more concerned with revenue raising in the coming years which is likely to influence its thinking regarding future tax changes.

The main thrust of the report is to highlight several features of CGT which can distort behaviour, including its’ interconnection with Income Tax and with Inheritance Tax. Its suggestions include:

Rates and Boundaries

  • Aligning the CGT rates with Income Tax or look at the connection between CGT and Income Tax
  • If there is to be alignment with Income Tax rates how will inflationary gains be treated e.g. re-introduction of indexation relief
  • If the CGT rates are not aligned to Income Tax then there should be fewer rates than the current rates of 0%, 10%, 18%, 20%, 28%.

Aligning CGT and Income Tax

In relation to revenue raising, HMRC estimates that around £14 billion could be raised by aligning CGT and Income Tax, but that assumes that taxpayer behaviours are not changed. In practice, behaviour is likely to change in the light of changing allowances and rates so the expected increase in taxes raised may not happen. While tax revenues from economic growth continue to grow we may see any change to CGT postponed. Not least because changing CGT will be politically difficult for the Conservative party. The Government has a number of measures to raise tax and with the size of the state increasing and a high level of borrowing we think that changes to CGT could still happen in the future.

Annual exempt amount

The OTS believes that the relatively high level of the annual exempt amount (confirmed at £12,300) distorts investment decisions. In tax year 2017/18, around 50,000 people reported net gains close to the threshold and so ‘used up’ the tax-free exemption. As the annual exemption cannot be carried forward, there is a strong incentive to use it each year.

Reducing the annual exempt amount so that it mainly operates as an administrative de minimis threshold to avoid the cost of collecting relatively small amounts of tax would increase the number of taxpayers required to pay CGT in 2021/22. The number of people paying CGT would double if the annual exempt amount were reduced to around £5,000 and would nearly triple at an annual exempt amount level of around £1,000.

Capital transfers: Interaction with IHT

The OTS has already reviewed and made recommendations in relation to IHT reform. In that report, they recommended that a taxpayer should not get both an IHT exemption and a CGT uplift on death.

So, where an asset passed free of IHT on death, in particular via spousal exemption, Agricultural Property Relief or Business Property Relief, it should not also be uplifted in value for CGT purposes. However, if the uplift for CGT was removed on death, it is intended that this should be considered alongside extending the relief available for making lifetime gifts and a new re-basing at perhaps the year 2000 (the last time base costs were rebased was in March 1982).

Business reliefs

Entrepreneur’s Relief (re-named Business Asset Disposal Relief in this year’s Finance Act) was reviewed in the Budget last year and the cumulative limit for disposals qualifying for the relief was reduced from £10 million to £1 million.

The OTS has put forward a challenge to the appropriateness of the relief in its current format. They believe that there is a policy judgement for Government to make about the extent to which CGT reliefs on disposal should be used to seek to stimulate business investment and risk-taking. If the Government wish to encourage business investment and risk-taking then incentives such as tax relief, if required, should apply at the time the investment decision is made rather than on disposal.

The OTS also note that Business Asset Disposal Relief and its predecessors have also long been understood as having another objective – as a specific relief when business owners retire, in recognition that a person’s business can be an alternative to a pension. If this were the objective, the Government could, for example, consider reintroducing an age limit, perhaps linked to the age limits in pension freedoms, to reflect the intention that it mainly benefits those who are retiring.


5. Residential property & Stamp Duty Land Tax (SDLT)

Stamp Duty Land Tax (SDLT)

The temporary increase of the residential SDLT Nil Rate Band has now ended, so rates have reverted to the amounts shown below:

1 October 2021 onwards Purchase Price Rate Higher Rate
Up to £125,000 0% 3%
£125,001 – £250,000 2% 5%
£250,001 – £925,000 5% 8%
£925,001 – £1.5 million 10% 13%
£1.5 million + 12% 15%

Higher rates apply for second homes with an additional surcharge of 3%. You will not pay the extra 3% SDLT if the property you’re buying is replacing your main residence and that has already been sold.

If you have not sold your main residence on the day you complete your new purchase, you will have to pay the higher rates because you own two properties. You can apply for a refund if you sell your previous main home within 36 months.

There are a number of additional factors that need to be considered regarding SDLT, including first time buyer relief or the higher rates for those that own, or have an interest in, more than one property.

60-day reporting for Residential Property

 In an amendment to the 30-day reporting requirement for UK residents that was introduced in April 2020, the deadline for reporting was increased to 60 days.

Where a UK residential property is sold, transferred or gifted and a tax liability arises, the disposal must be reported, and the tax paid, within 60 days of completion. It has been confirmed that the increased reporting window will also apply to non-UK residents for disposing of UK property.

If you are intending to sell, transfer or gift a property, please bear in mind the 60-day reporting requirement as the funds to settle the liability must be readily available. For the avoidance of doubt, it is beneficial to check the position as soon as possible to ensure there is enough time to take the appropriate actions.

Old Mill has a dedicated team that can help with the reporting requirements and are available to answer any questions you may have.

New rates of SDLT for non-UK residents from 1 April 2021

HMRC have introduced new SDLT rates for non-UK residents who purchase UK residential property, completing on or after 1 April 2021. A surcharge of 2% will be added to existing rates payable by UK residents.

This change in rate applies to both freehold and leasehold properties with new rates payable on rents when new leases are granted.


6. Investments

Individual Savings Accounts

The Individual Savings Account (ISA) annual subscription limit for 2022-23 will remain unchanged at £20,000.

The Junior ISA and Child Trust Fund annual subscription limit for 2022-23 will also remain unchanged at £9,000.

The Lifetime ISA (LISA) limits are unchanged, allowing those aged between 18 and 39 to save up to £4,000 a year towards their first home or retirement, and gives them a 25% cash bonus of up to £1,000 a year on top.

With tax rises on the horizon, we would strongly recommend you shelter savings and investments in tax efficient products such as ISAs and Pensions. With plenty of time left before the new tax year, an individual who has not already taken out an ISA could shelter up to £40,000 in the next six months and a couple up to £80,000.

National Savings & Investment (NS&I) Green Savings Bonds

NS&I launched its new Green Savings Bonds last week and it has been argued that the rate on offer explains why its announcement was not held back for the Budget.

In his March Budget, Rishi Sunak revealed ‘a new, retail savings product to give all United Kingdom savers the chance to support green projects’ however there was no more information available at the time.

Nearly four months later, National Savings & Investments (NS&I) released details of its new Green Savings Bonds (GSBs), but both a specific launch date and the underlying interest rate were missing. On 22 October, without even a press release ahead of time, NS&I have opened the Green Bonds for investment.

The sudden appearance, five days before the Budget, is probably explained by the rate on offer: 0.65% pa fixed for three years. There had been an expectation that the Chancellor, having heralded the Green Bonds in his Spring Budget, would perform a rate reveal in the Autumn Budget. Someone, somewhere (or perhaps everyone, everywhere) in the Treasury clearly decided that 0.65% was best left out of last Wednesday’s speech.

Many will be attracted to the Green Bonds with the projects the money is aiming to support – including cleaner transport, renewable and efficient energy projects as well as protecting natural resources and adapting to a changing climate. But from a purely rate point of view, in the retail marketplace, the top three-year fixed rate bonds offer around 1.8% (Moneyfacts November 2021) – nearly three times as much. 0.65% is even available from some instant access accounts.

The launch day coincided with headlines quoting the new Chief Economist at the Bank of England saying in an FT interview that he expected inflation to be ‘close to or even slightly above 5%’ early in 2022 so the Green Bonds are highly unlikely to keep pace with inflation for the three year term.


7. Pensions

The Annual Allowance (the amount you can pay in) remains at £40,000, together with the ability to bring forward unused allowances from the previous three tax years.

This is good news as it is possible to obtain up to 60% income tax relief on your pension contributions (where your income subject to tax relief is in the range £100,000 to £125,140), 45% relief (where your income subject to tax relief is over £150,000), 40% relief for higher rate taxpayers (where your income is over £50,270) and 20% relief for basic rate taxpayers.

The Pensions Lifetime Allowance (LTA) is to be maintained at its current level of £1,073,100 until April 2026. This is likely to have an impact as inflation starts to take off again.  If the standard LTA had continued to be uplifted with inflation it would be around £1.2 million by April 2026. It will now be around £125,000 less than this which means individuals approaching £1 million now without any specific LTA protection would miss out on up to £31,250 of extra tax-free cash. If the value of all of your pension benefits, across all schemes exceeds the LTA, any excess attracts a tax charge of 55% if it is withdrawn as a cash lump sum, or if it is withdrawn as an income (for instance from an annuity or a drawdown arrangement) the tax charge falls to 25% plus there will also be an Income Tax charge on top.

Some larger funds may have a protected higher LTA of £1.25 million, £1.5 million or £1.8 million in place. Speak to your Old Mill planner if you are affected as this is a complex area.

In the run up to the budget the media reiterated the annual warning that the ability to take 25% of the pension fund as a tax-free amount may be withdrawn. To us, this would be such an unpopular move that it is unlikely, although remains a possibility in the future.

A rumour which is perhaps more likely was the prediction that the inheritance tax free nature of pension funds could be changed. As part of pension freedoms which took effect from April 2015, it was confirmed that a pension fund would usually not form part of your estate on death. But no mention of this was made in the budget documents.


8. Inheritance Tax

The Inheritance Tax (IHT) nil rate band will remain at £325,000 and the residence nil rate band at £175,000. The residence nil rate band will start to be reduced once the size of the estate reaches £2 million. Both these allowances will be fixed at this level until April 2026.

The nil rate band has been set at £325,000 since April 2009, meaning that by the time April 2026 comes around we will have seen the same threshold for 17 years! Previous to April 2009 the threshold was increased annually.

The initial ‘freeze’ in the nil rate band has seen more and more individuals and trusts being brought into the IHT net. Whilst the rate of IHT has remained at 40%, it is inevitable that any future increase in asset values could result in a significant increase in tax for many people.

The introduction of the residence nil rate band (RNRB), from 2017/18, has slowed the growth in IHT receipts and reduced the number of estates liable to IHT.

This emphasises the importance of planning and ensuring that you have considered the impact of the frozen band on your estate.

Any changes around the potential simplification of IHT as a result of the 2019 consultation by the Office for Tax Simplification are yet to be seen. The review was an attempt to make the myriad of rates and exemptions simpler, however we may yet see measures to increase the amount of IHT the Government collects.


9. Trust & Estate taxation

Simplification

There were again no announcements by the Chancellor in respect of the taxation of Trusts and we continue to wait for any proposals for potential simplifications in this area.

Income Tax

Income Tax rates remain the same, with discretionary Trusts being taxed at 45% (38.1% for dividend income) with up to the first £1,000 taxed at the lower rates of 20% (7.5% for dividend income). Life interest Trusts and Estates will continue to pay tax at the lower rates.

From April 2022, Trusts will be impacted by the increase in Dividend Tax of 1.25% in respect of the changes to Social Care. Higher rates of dividend income will have a rate of 39.35% and the lower rate will increase to 8.75%.

Capital Gains Tax

The annual exemption will remain at £6,150 for Trusts, although as usual this is diluted where the settlor has created more than one Trust. The Estates annual exemption will remain at £12,300 for the year of death and two subsequent tax years. These will be fixed until April 2026.

Trust Registration

Although not announced in the Budget, we now know that new rules, which were announced on 6 October 2020, extend the scope of Trusts currently required to register on H M Revenue & Customs online registration service. Currently only Trusts with a UK tax liability are required to register, however these new rules will result in all UK Trusts (bar a few exclusions) being required to register by 1 September 2022. Please speak to your Financial Planner if you are unsure whether any Trusts you are connected to may be affected.


10. Tax Administration & other issues

Reform of late submission and payment penalties

The Government are looking to reform how VAT taxpayers and those in Self-Assessment are charged for late submission of returns and late payments of tax, by introducing a new points-based system for late submission. They will only look to raise a financial penalty once a relevant threshold is reached.

The new late payment regime will issue penalties proportionate to the amount of tax due and also how late the tax is.

The reforms are first set to take effect for VAT taxpayers for periods starting on or after 1 April 2022. The next band will include Self-Assessment taxpayers with business or rental income over £10,000 per year and this has been delayed for a year in line with the changes to Making Tax Digital (MTD) and will now apply from 6 April 2024. Finally, all other Self-Assessment taxpayers will also be delayed a year and will apply from 6 April 2025.

Currently there is no further detail on this points-based system and Old Mill expects to see further detail in the next financial year.

Tax Evasion and Avoidance – Clamping down on promoters of tax avoidance

As discussed in the Spring Budget, there has now been a package of measures put in place that will introduce new legislation consisting of four parts, designed to reduce the tax avoidance market:

  • imposing new penalties for UK entities that support offshore promoters
  • allowing HMRC to apply to the court to freeze a promoters’ assets so that the penalties promoters incur are paid
  • allowing HMRC to petition the court to wind up companies and partnerships involved in promoting tax avoidance
  • supporting taxpayers to identify and steer clear of or leave tax avoidance.

Our specialist Tax and Trust team are here to help if you need help in this area.