Rishi Sunak has just announced in his spring statement that there will be an increase to the National Insurance threshold with effect from July so that people will now only pay NI on earnings over £12,570. This brings the NI threshold into line with the level at which people start to pay tax.
He has also announced that from 2024 the lower rate of income tax, which now stands at 20%, will be decreased by 1 pence in the pound to 19p.
More to follow on this.
Due to the current economic situation the planned changes to some allowances for 2021/22 have not happened or have been slightly revised. So which tax allowances have changed for this year?
Not many allowances have changed this year and those that have changed have only done so by a small amount.
Capital Gains Tax (CGT), Inheritance Tax (IHT), the annual ISA Allowance and the Personal Savings Allowance are examples of some tax allowances that have not changed between 2020/21 and 2021/22.
You can see all of the current rates, including the rates from previous years, on the allowances page here.
The two main tax rates that have changed are the personal allowance and the personal tax rates (although these are intrinsically linked so could be counted as one).
The personal allowance has increased to £12,570 from £12,500 – so only a small increase – and the higher rate tax bracket now starts at £50,270 instead of £50,000.
Some allowances are also set to be frozen until 2026 so that some of the debt that has been built up over the last year can be recouped. Therefore, as people earn more, they may find that they are paying more tax.
It may be a while until we see a sustained increase in tax allowances.
In the budget today (3rd March 2021) the Chancellor of the Exchequer, Rishi Sunak, confirmed the the personal allowance for 2021/22 would increase to £12,570 as had previously been confirmed.
However, he also confirmed that, in order to start to claw back some of the massive spending that needed to happen in order to finance payments during the coronavirus pandemic, the personal allowance would remain frozen at that level until April 2026.
The personal allowance is the amount of money that can be earned before tax is paid. Once the level is passed, anyone who earns over £12,570 will need to pay tax at 20% for the amount of earnings between the personal allowance and the higher rate tax bracket.
In addition to this, the 40% tax bracket starting point, which will be increased slightly to £52,270 on 6th April 2021, will also be frozen for 5 years and will not be increased until at least 2026.
This means that as people start to see pay rises over the coming years, they may be pushed into a situation where they pay more tax or move into a higher tax bracket.
This announcement came alongside confirmation that the furlough scheme will be extended as will the SEISS scheme for the self-employed, plus there will be an extra £20 a week for those on Universal Credit and Working Tax Credit for the first 6 months of the 2021/22 tax year.
The stamp duty holiday will also be extended to the end of June with a partial amount also being available until the end of September.
The Capital Gains Tax allowance was also included in the budget and it was confirmed that this would increase to £12,300 for the tax year 2021/22 and then also remain at that level for 5 years until 2026.
The government has published the personal allowance for 2021/22 on its website and as such has confirmed that it will increase by the increase in the Consumer Prices Index for September 2020 which stood at 0.5%.
The personal allowance is the amount of money that each person can earn before paying tax on their earnings (assuming you have the standard personal allowance figure). For any earnings in the tax year above this figure, tax at the standard or higher rate needs to be paid.
As the personal allowance for 2020/21 was £12,500 (and had been for 2019/20 as well), the increase brings it up to £12,570 per annum.
This is a very small increase and will mean only a saving of £14 a year for a basic rate tax payer. For higher rate tax payers the saving will be higher depending on their earnings.
Other tax allowances for the different tranches of tax rates have also been increased by the same CPI rate (0.5%) and you can find these updated figures on the UK tax rates at a glance page.
The new personal allowance will reflect in the standard tax code for employees who do not have any other special tax allowances – giving a tax code of 1257L for the tax year 2021/22.
The personal allowance is the amount of money that you can earn in a tax year (in the UK) without having to pay tax on your earnings, or before you start to pay tax on earnings above that level. So how much is the 2020/21 personal allowance? Continue reading 2020/21 Personal Allowance
During the covid-19 pandemic the government announced a number of schemes to help people financially who were suffering a loss of income. One of those schemes was the Self Employment Income Support Scheme (SEISS) and here we are addressing the question – ‘Is the SEISS payment taxable?’ Continue reading Is the SEISS Payment Taxable?
In 2015 the Chancellor of the Exchequer, George Osborne, announced a major change in Inheritance tax which added on an extra element for family homes which were left when someone died. This amount was tapered starting in 2017 and the last part of that increase is happening in 2020/21.
In addition to the standard rate of Inheritance tax relief, which sits at £325,000, an allowance for family homes that are passed on to direct descendants (children and grandchildren) was also introduced which started at £100,000 in 2017 and increased to £175,000 for the tax year 2020/21.
So this tax year (2020/21) is the final year of the major increases to the property portion of the allowance, that finish up with a total allowance of £500,000.
The Inheritance Tax Allowance can be passed between couples, so that when the first partner dies the unused part of that allowance is passed on to the surviving spouse. When the second spouse dies the allowance can effectively be doubled.
For example spouse 1 dies and does not use any of his Nil rate band (perhaps he passes everything to his spouse and has not made any bequests to anyone else).
He can then pass his £325,000 allowance on to his wife. She will then have an allowance of £650,000.
The same thing can happen with the property part of the allowance that has not been used. This means that it is possible for the surviving spouse to have an allowance of up to £1m including the property allowance.
Obviously you need to check all of your details with your tax adviser to see what the situation is for your individual circumstances.
Although not technically a tax allowance, we thought it was worth covering what the rate of National Insurance contributions are for self-employed people for the tax year 2019/20.
Self-employed NI rates have been a bit confusing in the past few years as changes were proposed to scrap Class 2 NI and subject people only to Class 4 NI – however, these changes have been scrapped (for the present) so the two tier approach still applies.
If you are self-employed then the rate of National Insurance that you pay depends on your profits for the tax year. There are effectively 4 different tranches that trigger different rates of NI.
If your profits are less than £6,365 then you do not need to pay any National Insurance contributions. However, you may think it worthwhile to pay voluntary Class 2 contributions if you are not already covered for these in any other capacity as this may increase or entitle you to certain benefits including additional state pension or Maternity Allowance.
If your profits are between £6,365 and £8,632 then you only have to pay Class 2 NI contributions which are at a flat rate and not based on the amount of profits. Most people pay these through the self-assessment tax return.
For 2019/20 Class 2 NI contributions are £3 a week – so £156 for the year.
If your profits are £8,632 or above then you will also need to pay Class 4 NI as well as Class 2 NI payments. Class 4 NI is charged at 9% of profits between £8,632 and £50,000.
If your profits from your self-employed business are over £50,000 then you will need to pay Class 2 NI of £3 a week, plus Class 4 NI for the earnings between £8,632 and £50,000, plus 2% on earnings over £50,000.
There are some changes coming to the rules for Rent a Room relief in 2019.
Rent a room relief gives an exemption from income tax on profits of up to £7,500 to individuals who let furnished accommodation in their only or main residence.
Rent a room relief provides income tax relief for those letting out furnished accommodation. It was introduced in 1992 to encourage individuals to make spare capacity in their homes available for rent. The government intended this to increase the quantity and variety of low-cost rented accommodation, giving more choice to tenants and making it easier for people to move around the country for work.
The changes that are being introduced on 6th April 2019 are intended to make sure that the tax relief is used as it was intended, to encourage people to use their spare rooms to provide additional accommodation for people.
The change that is being introduced is that at some point during the period when the room is being rented out, the person in receipt of the income from the lodger must be residing in the property while money is being received for the extra room(s).
This means that you cannot claim the relief if, for example, you are on holiday for the whole of the period when the room is being rented out.
One example given is that if you rent out rooms in your home during the Wimbledon tennis championships, you must be resident in your home for at last part of that time.
So the additional test is essentially a ‘shared occupancy’ test and if the person in receipt of the income cannot satisfy this test then they will not be entitled to claim the Rent-a-Room relief.
You can find further details of the changes here.
The Capital Gains Tax (CGT) annual exempt amount is the amount of gains that you are allowed to make before paying tax on those profits.
Capital Gains Tax is paid when you sell or dispose of assets such as personal possessions worth more than £6,000, property that is not your main home, shares or business assets.
CGT is based on the amount of profit that you have made, not on the selling price.
Each year the CGT annual exempt allowance is increased in line with the rise in the Consumer Prices Index, rounded up to the next £100.
In 2018/19 the CGT allowance was £11,700.
In 2019/20 this will be increasing to £12,000.
The law also provides that the annual exempt amount available to most trustees of settlements is one half that due to individuals and so this will be £6,000 for the tax year 2019/20.
For details of all current tax rates that we monitor, please see this page.