Freezing of Allowances and Thresholds

To help meet some of the costs incurred in dealing with the Covid-19 pandemic, the Chancellor announced in his 2021 Budget that a number of allowances and thresholds will remain at their 2021/22 levels until 6 April 2026. Those affected are outlined below.

Personal allowance

The personal allowance was increased to £12,570 for 2021/22, up from £12,500 for 2020/21. It will remain at this level for the following four tax years, up to and including 2025/26.

The personal allowance is reduced by £1 for every £2 by which adjusted net income exceeds £100,000. For these tax years, individuals with adjusted net income in excess of £125,140 will not receive a personal allowance.

Income tax bands

The basic rate band was increased to £37,700 for 2021/22, from £37,500 the previous year. It will remain at this level for tax years up to and including 2025/26.

With a personal allowance of £12,570, the point at which an individual in receipt of the basic personal allowance starts to pay a higher rate tax is set at £50,270 until April 2026.

National Insurance threshold

The upper earnings limit for Class 1 National Insurance purposes and the upper profits limit for Class 4 National Insurance purposes are aligned with the point at which a higher rate tax is payable. Both are set at £50,270 for 2021/22 and will remain at this level for the following four tax years, up to and including 2025/26.

Other National Insurance thresholds and limits will be reviewed at the appropriate time.

Capital gains tax annual exempt amount

The capital gains tax annual exempt amount remains at its 2020/21 level of £12,300 for 2021/22. It will stay at this level for subsequent tax years up to and including 2025/26.

Inheritance nil rate bands

The inheritance tax nil rate band has been set at £325,000 since 2008/09 and was due for review in 2021. However, it will remain at this level for 2021/22 and subsequent tax years, up to and including 2025/26.

The residence nil rate band (RNRB), which is available where a main residence is left to a direct descendant, remains at its 2020/21 level of £175,000 for 2021/22 and the following four tax years. Where the estate is valued at £2 million or more, the RNRB is reduced by £1 for every £2 by which the value of the estate exceeds £2 million. It is not available where the value of the estate is £2.35 million or above.

Pension lifetime allowance

The pension lifetime allowance limits the amount of tax-relieved pension savings that an individual can build up. The lifetime allowance remains at ££1,073,100 for 2021/22 and for the next four tax years.

Impact of freezing allowances and thresholds

By freezing allowances and thresholds, the tax take will rise and incomes and assets rise with inflation. More people will pay tax and more people will pay tax at higher rates as a result, and more estates will be liable for inheritance tax.

It may be prudent to plan ahead. For example, review the value of the pensions fund before making any further tax-relieved contributions – where the value of the fund exceeds the lifetime allowance, a tax charge is levied on the excess, at 25% where the excess is taken as a pension and at 55% where it is taken as a lump sum.

Partner note: Finance (No. 2) Bill 2019—21. Cl. 5, 28, 40, 86.