Budget 2021: Key points for paraplanners 

3 March 2021

With £355 billion of debt having been accumulated in the past year and a potential £204 billion or more to be added in 2021, the Chancellor of the Exchequer Rishi Sunak was always going to be looking at ways to start increasing the size of the Treasury’s coffers without alienating large sections of the electorate. There has been plenty of speculation in the past couple of weeks or so around tax rises but in the main, the Chancellor has chosen to do this through fiscal drag, freezing rates for periods of up to five years, to gradually sweep more people into tax nets.

There may be more yet to come in a separate announcement of consultations to be published on 23 April in a Command Paper under the title of: Tax policies and consultations.

For now, here are key points from the Budget that may affect  advice to clients.

The Chancellor began his Budget on Wednesday with some good news for the millions of employees on furlough as well as the self-employed by extending the furlough scheme to September.

As the UK continues to deal with the financial fall-out from the Covid-19 pandemic, Sunak announced that the furlough scheme will continue to pay 80% of wages for those who have been furloughed up to £2,500 a month but will start tapering the scheme to 70% of wages in July and 60% in August and September, with employers expected to top up to 80%.

Meanwhile, the Chancellor said the Self-Employment Income Support Scheme (SEISS) will be extended to 600,000 people who were previously excluded, with a fourth grant set to run from February until April followed by a fifth grant from May to September.

Commenting on the extra government support, Sarah Coles, personal finance analyst at Hargreaves Lansdown, said: “The government has learned how much damage can be done by prioritising hope over experience. After the tapering of the furlough scheme in the autumn sparked record redundancies, it’s being much more cautious this time round. It needs to be flexible too.

“The extension of the self-employment grant to those who have just submitted their first tax return will come as a huge relief. The last year has been an incredible struggle in impossible circumstances without government support beyond Universal Credit.

“However, this doesn’t help all of those excluded from government schemes. There’s no respite for self-employed people with profits of over £50,000 or who receive less than 50% of their income from self-employment, who will continue to battle on. It must seem even more unjust that the scheme is scooping up hundreds of thousands more people, and still leaving them behind. This time, we need the scheme to adapt quickly and offer clarity, to help support as many people to stay in work as possible.”

Tax freeze
The Chancellor also announced that the Government had little choice but to freeze various tax thresholds.

Both the income tax personal allowance and higher rate threshold will be uprated in line with CPI as planned in April (to £12,570 and £50,270 respectively), but then frozen for five years until April 2026, as the Government seeks to repay its vast borrowing.

Laith Khalaf, financial analyst at AJ Bell, said: “The Chancellor has reverted to a tried and tested method of increasing taxes without raising the hackles of the electorate, by freezing allowances after April this year until 2026. Usually, the Treasury is a bit sneakier, bumping allowances up by inflation rather than earnings each year and creaming off the difference, in a process called fiscal drag.

“Freezing allowances is fiscal drag on steroids and will collectively cost taxpayers £19 billion over the next five years. It will slowly but surely mean that from 2022, millions of people will pay more income tax, without the government actually adjusting the headline rate.”

Khalaf added: “Assuming 4% wage growth, someone earning £41,000 today will be earning £50,000 in five years’ time and potentially starting to pay higher rate tax. The people who will feel the sharpest pain are those just under the thresholds, because as their earnings rise, the amount of money they take home per £1 of extra gross salary goes down significantly.”

IHT and pension allowance
The Chancellor also announced that inheritance tax thresholds, the pensions lifetime allowance and the annual exempt amount for Capital Gains Tax will be maintained at their existing levels until April 2026.

The IHT nil-rate band will continue at £325,000 and the residence nil-rate band will continue at £175,000, while the residence nil-rate band taper will continue to start at £2 million.
Meanwhile, the pensions lifetime allowance will also be maintained at its current level of £1,073,100 until April 2026 – a decision that drew widespread criticism from industry experts.

Simon Harrington, senior public policy adviser at PIMFA, said the industry body was “dumbfounded” at the Chancellor’s decision to freeze the allowance.

Harrington said: “Doing so, penalises pension savers looking to secure their future and in the most extreme cases sees people left with no choice but to give up work. Freezing the lifetime allowance could see a number of people inadvertently exceed their allowance and, as we have seen previously with NHS workers, incur a 55% tax hit which they otherwise would not have to pay.

“Freezing both the Inheritance Tax and Capital Gains Tax also discourages the public from investing in our economy at a time when the Chancellor himself admits we need an investment-led recovery. Whilst we strongly believe that there should be focus on repairing public finances, freezing the thresholds for Inheritance Tax, Capital Gains Tax and the Lifetime Allowance attacks individual personal finances and aspiration. Covid has shown how fragile the UK’s consumption driven economy can be. We need to become a more resilient and investment driven country. This cannot be achieved without the savers and investors that would be most hit by these changes.”

Adrian Lowcock, head of personal finance at Willis Owen, commented: “Freezing the allowance doesn’t impact people today, but it will have a huge impact on peoples’ retirement plans, especially if inflation returns in a meaningful way. The CGT tax-free allowance has also been frozen. This is a tax that affects the sale of a wide range of investments, from property to shares, to cryptocurrencies.

“Freezing allowances discourages people from using pensions for their retirement as well as punishing those who have done the right thing and saved and invested wisely for their future. This is a passive approach to raising more taxes but fortunately savers and investors can do something about it by maximising their other allowances such as ISAs.”

Tom Selby, senior analyst at AJ Bell, echoed the sentiment and warned that “large swathes of middle Britain” are now at risk of being dragged into its net.

Selby added: “High earning doctors and consultants in the NHS will be among those hit by this measure. Furthermore, the longer it is kept at the current level, the more it will cap the retirement saving aspirations of future generations. The impact will depend in part on what happens to inflation over the next four years. If CPI were to rise in line with official OBR forecasts, it would imply an increase in the lifetime allowance of around £85,000 by 2025/26.”

Corporation tax and stamp duty
While the UK economy is set to return to its pre-pandemic size quicker than originally forecast, Sunak warned that recovery “will take time” and in an effort to boost government finances, corporation tax will increase from 19% to 25% from April 2023. The increase will be tapered depending on size of profits, with companies with profits over £250,000 paying 25%. Firms earning under £50,000 profit will qualify for a ‘small profit rate’ of 19%. The move is designed to raise a projected £16 billion a year from profits.

However, homebuyers will enjoy a three-month extension to the Stamp Duty holiday, which was introduced to boost the property market affected by lockdown and help buyers who may have been financially affected by the pandemic.

The tax break, which has applied on the first £500,000 of all sales since last July, will now continue until the end of June. After that date, the nil-rate band will be set at £250,000 until the end of September before returning to its usual level of £125,000 from October 1st.

The government will also introduce a new mortgage guarantee scheme in April 2021, which will provide a guarantee to lenders across the UK who offer mortgages to people with a deposit of just 5% on homes with a value of up to £600,000.

Tom Brown, managing director of real estate at Ingenious, said: “The Chancellor’s decision to extend the Stamp Duty Land Tax holiday and provide a Government-backed guarantee to mortgages with deposits of just 5% reflect the importance of maintaining optimism in the UK housing market.

“This level of support shows that the Government continues to view the housing market as key to the UK economy at a time when the latest Nationwide House Price report confirmed that demand from buyers is being sustained.”

Dave Harris, CEO at more2life, added: “Today’s tapered extension to the Chancellor’s stamp duty holiday will undoubtedly be welcomed by those people and families – as well as conveyancers and lenders – who have been desperately pushing to meet the initial deadline at the end of March.

“At more2life, we would expect to see 5% of equity release cases linked to house purchases in ‘normal’ market conditions. However, this figure has reached 15% in recent months as a direct consequence of the stamp duty holiday. Buyer demand has been mounting since the introduction of the tax cut in July 2020, particularly in the lifetime mortgage market.

“While the stamp duty holiday extension is welcome, people should not be complacent as the lenders, conveyancers and Government systems are still under a huge amount of pressure. It is still likely to take longer than normal to complete due to the volumes that organisations are dealing with and we urge equity release advisers to work closely with lenders over the coming weeks to ensure that they are better able to manage client expectations.”

Green bonds

Finally, the Chancellor announced that it will be offering a green retail savings product through NS&I in the summer of 2021, which it said will give savers the opportunity to take part “in the collective effort to tackle climate change”.

Gemma Woodward, director of responsible investment at Quilter Cheviot, commented: “Ultimately, any measure which allows people to connect their own finances to the green economy and which broadens retail investor access to a diverse array of green products is welcome.

“However, the million pound question is how much will be raised from retail investors through the green savings bond? Will it actually make a difference to efforts to achieve net zero? Perhaps not on their own, but accompanied with green gilts for the institutional market, which will also be launched this year, they could make a difference.

“And the success will depend on whether the money is eventually spent on truly green projects, and how the government will measure and report impact to savers.”

Professional Paraplanner