You may have noticed that a certain phrase came up more than once in the Chancellor’s Budget speech last week.
The phrase went something like this:
Allowances/rates will be frozen at this level until April 2026.
That’s four years of flat-lining rates and allowances and it applies to income tax, capital gains tax, inheritance tax and pension tax relief.
At first glance this may seem like a good deal for taxpayers, no tax increases, but all is not what it seems.
Income tax
Because wage rates tend to increase over time, and hopefully we should soon be moving out of recessionary times, then if your tax-free allowance is pegged to a fixed amount (£12,570 for income tax purposes), more and more of your extra earnings will be subject to tax.
The budget also pegged the basic rate threshold for income tax at £37,700 for the same period. This measure will likely mean that an increasing number of individuals will find themselves paying income tax at the 40% or higher rates for the first time.
Capital Gains Tax (CGT)
As assets subject to CGT when sold, second homes for example, tend to increase in value over time, as the tax-exemption is being pegged – currently £12,300 a year – an increasing amount of any profit on disposal will be taxed.
Inheritance Tax (IHT)
At present, lifetime gifts are potentially subject to this tax as well as your estate when you die. Currently, and until April 2026, £325,000 of your estate is exempt from this tax and your executors can also claim up to an additional £175,000 relief that relates to your family home.
As with CGT, as the value of your estate will likely rise in value between now and 2026, more of your assets will be subject to IHT.
Pensions
In a similar vein, as the amounts of allowable pensions savings are being pegged at £1,071,100 and the annual contributions allowance at £40,000, it will not be possible to inflation proof your pension pots if you have already reached this savings limit (£1,071,100). In fact, you could top-up pensions savings above these limits, but punitive tax would be levied on any excess.
It will be interesting to see if the Chancellor can maintain this hiatus in tax allowances as the next general election looms, 2 May 2024.
Source: DocSafe
