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Budget 2021: Income Tax Thresholds Frozen until 2026

The March 2021 budget was one of the most anticipated in living memory as media speculation leading up to the announcement told us that the billions spent managing the Coronavirus pandemic “will have to be paid back”.

Income Tax changes are one of the more controversial elements of the Chancellor’s budget announcement, largely because the rate of Income Tax has a direct impact on the disposable income of those who are subject to the tax, which is a significant proportion of the UK population.

The March 2021 budget was one of the most anticipated in living memory as media speculation leading up to the announcement told us that the billions spent managing the Coronavirus pandemic “will have to be paid back”. These huge sums are not only borne from business support payments and the job retention scheme but also the increased expenditure within the NHS and other areas of infrastructure.

The Rate of Income Tax is Frozen

Alongside other taxes, rates of Income Tax were frozen by the Chancellor and at first glance, this might be looked upon favourably by taxpayers. However, in reality, such a decision is aimed at increasing the amount of money collected by the treasury. This happens because freezing the tax rates at the same time that wages increase, as they naturally do each year means more people’s taxable income will fall into higher tax bands and therefore, in simple terms, they will pay more Income Tax.

The debate about the fairness of this move is ongoing but the freeze is planned to stay in place for five years and is set to mean approximately 1.3 million people who were before below the earnings threshold for Income Tax will begin paying. Alongside this, one million more people are projected to become higher-rate taxpayers by 2026.

If You Are or Are Likely to Become a Higher-Rate Taxpayer…

As is the case in all areas of financial planning, changing or even beginning a proactive approach to tax planning is essential to ensure your circumstances remain tax efficient. This is especially the case when a budget announcement is as far-reaching as what we have seen this year.

Not Just One Tax in Isolation

Whilst this article focuses heavily on income tax, this is just one tax in isolation that may affect you or your business. It’s important however to understand how all of the changes in the budget may have an impact on your short and long term plans. To do this effectively, it’s important to consult an experienced tax adviser such as Charter and May who understands not only where new liabilities may arise, but also create a forward-thinking strategy for maximising tax efficiency.


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