Another budget has come and gone and again, on the surface, it seemed unremarkable with no significant changes to personal allowances, tax brackets or to capital gains tax, which has been the subject of considerable speculation in recent months. However, there were significant changes announced for taxes on business, to be rolled out over a multiple year timeframe, that reinforced the general belief that this would be a budget to alleviate the growing fiscal deficit which has mushroomed during the pandemic.

To this effect, the Office of Budget Responsibility had advised that this budget will raise the tax burden to levels not seen since the 1960’s and is expected to rise to 35% of GDP by the 2025/26 tax year. The rise will hit both businesses and middle-income earners. With little change to personal allowances, and now fixed at the same rates for the next four years, such action will bring, according to OBR, a further 1.3 million people into the UK’s taxpaying system and a further 1 million taxpayers into the higher tax bracket.

While the personal tax-free income allowance will increase from £12,500 to £12,750 in the 21/22 tax year, there will be no further increases considered until 2026. Similarly, the higher-rate threshold of £50,000 will increase to £50,270 for the next tax year and remain unchanged until 2026. With inflationary pressures on wages, this will certainly contribute, as intended, to increased tax collections and is currently referred to as ‘fiscal drag’. By freezing tax rates and allowances, it is expected that a further £19bn will be collected by April 2026, a relatively small chunk of the current national debt of £300bn resulting from the supportive measures taken during the current Covid-19 crisis.

The inheritance tax threshold of £325,000 (set 10 years ago) remains unchanged as does the capital gains tax allowance and the pensions lifetime and annual allowance.

The pensions allowance offers each taxpayer an opportunity to reduce their taxable income. Where contributions are made to a registered pension scheme, tax relief is available in the same tax year in which those contributions are made.For contributions to a ‘relief at source’ scheme, basic tax relief is given at source, and deemed to be paid net of the basic rate of tax applicable, typically 20%. For those taxpayers on higher rates of tax, 40% and 45%, the extra tax relief is claimed through the annual self-assessment process.

While the lifetime allowance for pensions contributions currently remains set at £1,073,100, the annual allowance of £40,000 for pension contributions per tax year may be increased by the amount of the annual allowance that remains unused from the previous three tax years.If you are close to the higher tax brackets of either 40% (with taxable income in excess of £50,000) or 45% (where taxable income for the year exceeds £150,000) you may wish to pursue the opportunity to increase your pension contributions and therefore minimize the impact on your tax liabilities.

The UK Government is forever committed to generating capital growth and safeguarding the longer-term prospects of the economy. In this regard, tax relief is available through various Government incentives, a scheme aimed primarily at encouraging people to invest in higher risk companies. As a result, tax relief is available to those investing in companies that are focused on growth and development who satisfy the overall ‘risk to capital’ condition of the scheme, be it an Enterprise Investment Scheme (EIS), a Seed Enterprise Investment Scheme (SEIS) or a Venture Capital Trust (VCT).

When subscribing for shares in an unquoted trading company, on EIS terms, tax relief of 30% of the amount subscribed is available, up to the maximum allowed per tax year, typically £1m, with investments of up to £2m accepted for knowledge-intensive companies. As EIS tax relief is aimed at reducing the overall tax liability, the liability to tax should be sufficient for the full EIS tax relief to be utilized as there will be no refund where the amount of relief exceeds the tax assessed.

Under an SEIS, income tax relief is available on 50% of the amount subscribed, capped at £100,000 per tax year.

With a VCT, tax relief of 30% of the amount subscribed is possible, up to a limit of £200,000. The relief is clawed back if the investments is disposed of within the first 5 years.

In addition to the above, there is also the opportunity to subscribe to shares in a social enterprise where social investment tax relief is available of 30% of the amount subscribed, limited to £1m.

For further comment and insight into any of the above, as you contemplate the upcoming end of the 20/21 tax year or to consider what plans you can put in place for the next tax year, contact Hodgens Global.