In the Spring Budget the Chancellor announced some important changes to our finances. These include differences in the taxes we pay, how much we can save for a pension, the minimum we can earn, and how we buy a home.
Here are all the Budget changes you need to know to plan the best for your money.
Lifetime pension allowance
The limit on how much in pension savings (at least ones that benefit from tax relief) an individual can build over their lifetime has been frozen. It will now stay at its current level of £1,073,100 until 2025/26. It had been expected to rise by £5,800 this year in line with inflation. Breaching the lifetime allowance (LTA) triggers a penalty of up to 55%.
Anyone worried they might reach the lifetime allowance in the next five years may wish to keep a close eye on their contributions and consider reducing the amount they save or taking their pension earlier than planned.
Pots are tested by HMRC for lifetime allowance purposes at the point you first start taking from your pension, and again at age 75. How you manage your pot in the intervening years will be important to make sure it does not trigger a charge when the LTA is tested again at 75. Pensioners can manage this by taking taxed income and not paying in contributions.
There is also another way around the LTA limit. ISAs can be used as an addition to retirement income. That is an extra £20,000 a year to invest tax-free, with no limits above which charges will apply.
Inheritance tax threshold
The inheritance tax threshold has been frozen at £325,000 until 2025/26, meaning that it will have been kept at the same rate for 17 years. If the threshold had kept up with inflation it should now stand at £446,000 - this is only set to get worse between now and 2026.
Increasing asset values, coupled with inflation, will mean thousands more estates will likely be liable to pay the tax over the coming years.
Capital gains tax allowance
The capital gains tax allowance has been frozen at £12,300 until 2025/26. If you’re married or in a civil partnership there’s a way around the limit, however. You can transfer assets between you and your partner without incurring a charge, which can allow you to use two lots of the £12,300 capital gains tax allowance if you have a large gain.
Personal income tax allowance
Technically the government kept its promise not to increase the rates of income tax, national insurance or VAT. However the tax-free personal allowance will be frozen at £12,570, and the higher rate threshold, from which tax is charged at 40%, will be frozen at £50,270, from April 2021-2026.
A freeze on income tax thresholds effectively equates to a pay cut as the personal allowance of tax-free earnings will not rise with inflation for five years.
Universal Credit uplift
The £20 weekly uplift in Universal Credit worth £1,000 a year will be extended for another six months. Also Working Tax Credit claimants will get a £500 one-off payment.
Minimum wage increase
Anyone earning the National Living Wage will see an increase from 1 April to £8.91 an hour, which will for the first time also include those aged 23 and over. This means 23 and 24-year-olds who are currently on £8.20 an hour will see their pay jump by 71p an hour. Basic rate workers will get a 2.2% increase of just 19p an hour.
Furlough will be extended until the end of September. The government will continue paying 80% of employees’ wages for hours they cannot work because of coronavirus. From July employers will be asked to contribute 10%, and 20% in August and September.
Self-employed support scheme
Grants, under the self-employed support scheme, for those who work for themselves and have lost out because of coronavirus have been extended until September. Also 600,000 more self-employed people will be eligible for help under the scheme as access to grants has widened to include those who filed a tax return in the year 2019/20.
Stamp duty holiday
The stamp duty holiday on the first £500,000 of a house purchase price has been extended for a further three months until 30 June. After that the nil rate band will be set at £250,000 - double its standard level - until the end of September.
However mortgage brokers have warned a backlog due to the stamp duty holiday is causing long delays for homemovers, so only those who have already agreed to buy or sell may benefit from the extension. Last year saw a six-year high for home price growth at 7%, partly driven by the first stamp duty holiday.
The government is to offer homebuyers with small deposits a helping hand with a new 95% mortgage guarantee scheme for properties worth up to £600,000. Lloyds, NatWest, Santander, Barclays and HSBC will offer these mortgages from next month, with Virgin Money to follow shortly after. Unlike other iterations of Help to Buy schemes, the mortgage guarantee scheme is open to everyone, not just first-time buyers.
In 2023 the rate of corporation tax will rise to 25%, but not for all companies. Firms with profits of £50,000 or less will continue to pay corporation tax at the current rate of 19%. This will be around 70% of companies, 1.4 million businesses, according to the Chancellor.
Businesses with profits of £250,000 or more will be taxed at the full 25% rate, around 10% of firms. There will be a tapered corporation tax rise for businesses with profits between £50,000 and £250,000.
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.