With the Budget just announced and tax year end approaching, it feels like the right time to recap on the last tax year while looking ahead to the next one.
Tax year end is always a busy time for us, and no doubt for you too.
A lot of this work relates to pension and Isa top-ups to make use of available allowances before they're lost.
It's also a good time to review the capital gains tax (CGT) position of clients' portfolios.
This allows you to see if any tactical sales can be made to use up CGT allowances, and to prevent gains from building up and causing problems down the line.
Ahead of the Budget, there had been speculation surrounding the reduction or even the removal of the CGT allowance.
While this didn't turn out to be the case, there has been a lot of freezing of allowances announced.
What hasn't changed
As per the government’s pre-election promise, the rates of income tax, National Insurance and VAT have not increased.
The CGT annual exemption hasn't reduced, but has been frozen at £12,300 until 2026.
Likewise, the allowance for most trusts remains at half of this amount; £6,150.
The dividend allowance will remain at its current level of £2,000 for individuals. The tax treatment of dividends within a trust will also not change.
The Isa allowance stays at £20,000, and the Junior Isa/child trust fund allowance is held at £9,000.
The starting rate for savings tax band, subject to 0 per cent tax, will also remain at its current level of £5,000.
On inheritance tax, the nil-rate band and residential nil-rate band are being kept at £325,000 and £175,000 (capped at the value of the home) respectively.
The tapering of the residential nil-rate band will still begin at £2m.
There have also been no changes to pension tax relief and pension contributions allowances will not change.
What has changed
On income tax the personal allowance will rise in line with the Consumer Prices Index (CPI) measure of inflation, as previously planned, from £12,500 to £12,570.
The basic rate tax band will increase to £37,700.
As a result, the higher rate income tax threshold will increase from £50,000 to £50,570.
The higher rate threshold for savings and dividends will apply across the whole of the UK, but will not apply to Scotland for non-savings and non-dividend income.
These allowances will then remain at these levels until April 2026.
On pensions, the lifetime allowance will remain at £1,073,100.
This had been expected to increase each year in line with CPI, as it has done each year from 2018/19.
It has now been frozen at the current level until April 2026 (from a paraplanner point of view, this is one to change in your report templates).
In light of the financial difficulties many people faced as a result of the pandemic, the government temporarily reduced the Lifetime Isa withdrawal charge from 25 per cent to 20 per cent for unauthorised withdrawals made between 6 March 2020 and 5 April 2021.
This meant investors would only lose the government bonus if funds are accessed for any reason (that is, not for retirement or a first home purchase). However, there's been no announcement of an extension to this.
Corporation tax and lifetime allowance: The implications
So corporation tax is the biggie.
It is now expected to rise from 19 per cent to 25 per cent for some businesses from 1 April 2023.
Small business, meaning those with profits up to £50,000, will still pay corporation tax at 19 per cent. Those with profits between £50,000 and £250,000 will have a tapered rate of corporation tax.
So what can we take from this, and how will it affect financial planning?
I believe the main impacts will be in relation to the lifetime allowance and corporation tax.
Taking the freezing of the lifetime allowance first, while this won't have significant immediate effects, it could have significant effects in the future.
The allowance is being frozen for at least five years from now.
If we look at the increases since the CPI method of valuation began (with the first increase in 2018/19), the total increase has been £73,100.
A tax charge of 25 per cent on this would be £18,275, or 55 per cent would be £40,205.
These are not insignificant amounts. For those working with clients to manage their lifetime allowance, the current approach must now be adjusted to exclude previously expected allowances.
Secondly, the expected increase in corporation tax also merits a change in approach.
Allowable expenses need to be reviewed, especially for those close to the £50,000 and £250,000 thresholds.
This includes strategies around pay (resuming the debate between salary and dividends), and also pension contributions. Naturally, these aren't simply the focus for financial planners, but for accountants as well.
Essentially, the Budget changes are relatively subtle this year, reflecting the government's priority of supporting the economy and individuals through the pandemic.
But there have also been references to returning to ‘fiscal conservatism’ once the economy is back on its feet.
This suggests we can expect greater changes in future years as the country (hopefully) begins to recover financially.