Rishi Sunak’s Budget could rightly be labelled the Stealth Tax Budget, at least in terms of personal, rather than corporate, finances.  Some allowances are seeing preannounced inflation increases for 2021/22.  Some are being held at their 2020/21 level.  But all are then to be kept static through to April 2026.

As a summary of the headline figures:

Income tax

• Personal allowance will increase to £12,570 for 2020/21, but then remain static to 2026
• Outside Scotland, the higher rate threshold will increase to £50,270 but then remain fixed to 2026.  The Scottish Government had already announced that this figure will be £43,662 for 2021/22, with no longer term pronouncement

Capital Gains Tax

• Annual allowance remains at current level of £12,300 through to 2026

Inheritance Tax

• Both the Nil Rate Band (£325,000) and Residence Nil Rate Band (£175,000) remain fixed to 2026.  When introduced, the original intention had been that the Residence Nil Rate Band would increase by CPI

Pensions

• Lifetime Allowance frozen at £1,073,100 until 2026 (was also scheduled for annual CPI increases)

What this means for middle-income earners

The impact of this loss of inflation-proofing can be much larger than it might appear.  Or to put it another way, these stealth taxes are stealthy! 

As an example, the income tax personal allowance will be frozen at £12,570.  If inflation over the following four years averages 2.5% pa, then it "should" have increased to £13,875. Someone in Scotland earning £35,000 will pay around £250 per annum more in income tax each year, more than a 5% increase in the level of tax paid.

Similar calculations apply in respect of the pension Lifetime Allowance and Inheritance Tax, though the subsequent tax increase is even more severe given the higher marginal tax rates involved (25% and 40% respectively).

Watch out for 23 March

There could even be more to come. The Government intends to publish further tax consultations on the 23 March. Capital Gains Tax and pension tax relief both featured heavily in the pre-Budget rumour mill, so could feature here.

The Budget could be just the starting gun for an array of tax changes, whether obvious or not. It is vital to plan ahead to ensure that all allowances are utilised to their maximum extent, and to mitigate the impact of exceeding any of the moribund thresholds. Have you thought about pension contributions to offset your tax burden? Could you get your savings into an income tax friendly place like an ISA? These are questions we will answer in more detail in the weeks ahead, so stay tuned.