In a Budget dominated by measures aimed at helping businesses and the economy recover from the impact of the coronavirus pandemic, there were also some significant announcements when it comes to your pensions, savings and the tax you pay.
Chancellor Rishi Sunak’s second Budget, delivered on 3 March, focused on ways to support businesses and jobs through the coronavirus pandemic, and looked towards the country’s long-term economic recovery.
Measures announced to address the ongoing impact of the pandemic included an extension of the job retention, or ‘furlough’, scheme until September, more support for self-employed people and an extension to the uplift in Universal Credit.
But there were also some significant tax announcements which could affect the way you earn, save and invest.
Tax-free Personal Allowance to rise but then freeze
While the Chancellor said there will be no change to the rates of income tax, national insurance or VAT he did announce changes to the tax-free Personal Allowance – how much people need to earn before paying income tax – as well as to tax bands.
From the new 2021-22 tax year starting on 6 April, the standard UK Personal Allowance will increase from £12,500 to £12,570. And the Chancellor announced that it will be frozen at this level until 2026.
From 6 April, the basic rate income tax band will increase to £37,700. This means that most people will start to pay higher rate tax when they have income of £50,270 or more. This higher rate income tax threshold will be frozen at £50,270 until 2026 too.
If you live in Scotland, the bands and rates of tax you’ll pay will be different. You can read more on Scotland’s income tax rates for 2021-22 here.
How does the Budget affect my pension savings?
The Chancellor announced today that the Lifetime Allowance will remain at its current level of £1,073,100 until April 2026. This is the total amount of pension benefits that you can build up during your lifetime across all pensions schemes before an additional tax charge applies. You can find out more about the Lifetime Allowance on the MoneyHelper website.
State Pension to increase as planned
The new tax year will also bring a rise of 2.5% to the State Pension. This means payments for someone eligible for a full State Pension will increase by £4.40 from £175.20 a week to £179.60 a week – an annual increase of £228.80. Those who get the older basic State Pension will see it increase from £134.25 a week to £137.60.
Remember that the current State Pension age is 66, and that’s due to rise in the future. To find out what you can expect to get from the State Pension, and when you can expect to get it, read The State Pension has changed – here’s what you need to know.
More tax changes to be aware of
There were also announcements covering corporation tax, inheritance tax and capital gains tax.
- Corporation tax on company profits is set to rise from 19% to 25% in April 2023 but with a reduced rate for smaller businesses with profits of less than £50,000.
- Inheritance tax rates will remain at existing levels until April 2026. The nil-rate band will continue at £325,000, the residence nil-rate band will continue at £175,000, and the residence nil-rate band taper will continue to start at £2 million.
- The capital gains tax-free allowance will also remain at the same level until 2026, which might affect you if you have other investments, in addition to pensions or ISAs.
ISA allowances stay the same
The yearly ISA (Individual Savings Account) allowance remains unchanged at £20,000 for the 2021-22 tax year. This can go into any of the different types of ISA available or a combination of them.
There could be more to come in 2021
On a final note, there could be more to follow later this year as the course of the pandemic and the rollout of vaccines play out and continue to affect the economy. The Government is expected to publish a package of tax-related consultations later this month and there could be more changes announced in the Chancellor’s Autumn spending statement.
But the MoneyPlus team will keep you up to date with any changes that could affect how you save for your future.
Pensions and Stocks & Shares ISAs are investments. They can go down as well as up in value and may be worth less than what was paid in.
Tax rules and legislation may change and your individual circumstances and where you live in the UK will have an impact on the tax you pay.
The information here is based on our understanding in March 2021 and should not be taken as financial advice. If you’re unsure please speak to a financial adviser. There is likely to be a charge for this.