Targeted freezes mean we won’t have had it so bad since Sixties

Plans to claw back billions of pounds for the Treasury include stealth measures to drag more households into the tax system

A SERIES of freezes to personal allowances as part of a revenue raising drive will see the tax burden increase to its highest level since 1969.

Setting out his long-term plan to get the public finances under control, the Chancellor revealed a number of “stealth” raids which will net the Treasury more than £21 billion.

Among the biggest revenue raisers announced by Rishi Sunak was a freeze in the income tax personal allowance, which will begin in 2022-23 and raise £19 billion for the Exchequer over four years.

The pension lifetime allowance, the amount people can build up in their pension pot before incurring additional tax charges, will also be frozen over the same period at just above £1 million.

Thresholds for inheritance tax and capital gains tax will also remain at existing levels until 2026, while the VAT registration threshold will also be frozen from April 2022. Prime Minister Boris Johnson’s triple lock pledge not to increase income tax, VAT or national insurance contributions over the course of the Parliament will be honoured.

Defending the measures yesterday, Mr Sunak said he was being upfront about the freezes, which he described as both “progressive and fair.”

However, business leaders warned that the move would drag more households into tax and hit higher earners and pensioners.

Income tax personal allowance

In one of the more contentious measures in the Budget, Mr Sunak confirmed that the threshold at which people start paying the basic and higher rates of income tax would be frozen.

The point at which people begin paying income tax will increase to £12,570 in April, as will the higher rate, which will increase to £50,270.

However, from then on it will be frozen at that level until 2026, meaning more people will be dragged into paying tax as wages increase.

It will raise £8 billion a year by the time the freeze is due to end.

The OBR has forecast that freezing the thresholds for four years will bring 1.3 million people into the tax system and create one million higher rate taxpayers over this period.

While fewer than four per cent of adults paid higher-rate tax in 1990, by the time the freeze is over that figure will likely be more than 10 per cent. Mr Sunak said: “Nobody’s take home pay will be less than it is now, as a result of this policy.

“But I want to be clear with all members that this policy does remove the incremental benefit created had thresholds continued to increase with inflation.

“We are not hiding it, I am here, explaining it to the House and it is in the Budget document in black and white. It is a tax policy that is progressive and fair.”

Welcoming the move, the Institute for Fiscal Studies pointed out that the personal allowance had risen by almost 60 per cent in the past decade, in turn reducing tax receipts by £25 billion a year. Two in five adults do not pay any income tax at all. But John O’connell, the chief executive of the Taxpayers’ Alliance, said: “There were some wins for taxpayers today, but it doesn’t gloss over the fact that this was a tax-raising budget.

“The chancellor is helping to rescue struggling sectors but £30 billion worth of tax increases will hit hard-pressed households and businesses already under the highest tax burden in 70 years.”

Pensions lifetime allowance

The lifetime allowance (LTA) on pensions will be frozen at just over £1 million, meaning more people risk being penalised for saving over the limit.

Mr Sunak said the LTA will stay at its

‘Tax rises worth £30bn will hit hardpressed households already under the highest tax burden in 70 years’

‘With property prices rising we will see yet more people caught by the unpopular inheritance tax net’

current level of £1,073,100 until April 2026, instead of increasing in line with the consumer price index.

A scheduled increase to £1.078 million in April has been cancelled. The freeze will raise £300 million a year within five years.

The allowance is a limit on the value of payouts from pension schemes – whether lump sums or retirement income – that can be made without triggering an additional tax charge.

By freezing the allowance, analysts have warned that thousands of savers will be pushed into paying the 25 per cent levy on additional income drawn from their pots, as well as the 55 per cent charge for those who withdraw lump sums.

It will also affect the 1.2 million people who are projected to exceed the threshold by the time they start drawing down income.

The Treasury argues that the move is fair because it mainly affects the wealthiest pensioners.

But last month Baroness Altmann, the former Tory pensions minister, said that many of the people affected are “not fat cats by any means.”

Raj Mody, global head of pensions at PWC, said: “Freezing the Lifetime Allowance is on the face of it easier than actively reducing it. But inflation means the implications will be much the same for savers over time, with more and more workers affected.

“Generation X – those currently working in their 40s and 50s and who may have already suffered other consequences from the pandemic – will be directly affected. Someone aged 50 now could be £85,000 worse off in tax by the time they reach retirement, if the Lifetime Allowance stays fixed.”

Inheritance tax

Inheritance tax thresholds will remain at current rates until 2026, meaning more people will be hit with the levy as the value of their estate rises over time.

The nil rate threshold is currently set at £325,000, although this rises to £500,000 for people leaving their main residence to their children or grandchildren, providing their estate is less than £2 million.

Neil Jones, tax and estate planning specialist at Canada Life, said: “The nil rate band increased to £325,000 in April 2009 and who would have thought it would remain at this level for 17 years.

“With property prices and investment markets rising and the lack of any increase, we will see yet more people caught by the inheritance tax net paying this deeply unpopular tax.”

Capital gains tax exemption

The Chancellor also announced that the capital gains tax (CGT) exemption would remain frozen at £12,300 until 2026, raising £65 million over five years.

However, this will come as a relief to many investors, who feared that the Government was preparing to cut the current threshold to as low as £2,000.

This was among the recommendations of the Office of Tax Simplification, which was commissioned by the Chancellor to look at ways of simplifying CGT.

If the changes had gone ahead, a higher rate taxpayer with a capital gain of £12,300 would pay £4,120 in CGT, instead of nothing.

VAT registration

The VAT registration threshold will remain frozen for a further two years at £85,000. In the UK, businesses must be registered for VAT if their taxable turnover exceeds this level.

The move is expected to raise

£165 million by 2026.