How the chancellor’s “big freeze” in tax allowances could affect your wealth until 2026

14th April 2022

In the 2021 Budget, the chancellor of the exchequer, Rishi Sunak, announced a “big freeze” of some individual allowances until 2026.

In this announcement, Sunak explained that, from April 2022, four key allowances will be frozen until 2026, potentially resulting in higher tax bills for many people around the UK.

So, with these “freezes” coming into force in April, read on to find out how they could affect your wealth over the next four years, and how your financial planner can provide guidance.

The pensions Lifetime Allowance (LTA)

The Lifetime Allowance (LTA) dictates how much you can save into your pension tax-efficiently over the course of your whole life. If you exceed it, you could be subject to a 55% tax charge if you take a lump sum upon retirement or a 25% charge if you take any excess as income.

When it was established in 2006, the LTA stood at £1.5 million. Since then, it has been decreased to £1 million, and is now frozen at £1,073,100 until 2026.

On the positive side, this means you can save more than £1 million into your pension over the course of your lifetime, and receive tax relief while you do so.

However, this allowance freeze could mean that the likelihood of your pension exceeding the LTA will increase.

Indeed, the number of people exceeding the LTA has risen every year since it was established in 2006. According to Investors Chronicle, the value of LTA charges has increased from around £10 million a year in 2006/07, to more than £300 million in 2019/20.

What’s more, data from Canada Life suggests that a pension fund of £469,000 could breach the LTA in 20 years, even with no further contributions, if the allowance rose by 2% a year from 2026 onwards.

Of course, it could be wise to continue contributing to your pension as much as you can, especially if you are at the beginning of your career. Your financial planner can provide expert guidance on your unique circumstances.

The Capital Gains Tax annual exempt amount

Capital Gains Tax (CGT) applies to profits you make from selling assets, including:

In the 2021 Budget, the chancellor announced that the CGT annual exempt amount will remain at £12,300 until 2026.

If the value of your taxable assets increases between 2022 and 2026, so you could pay more CGT on these assets when you sell them.

For example, according to the Office for National Statistics (ONS), UK house prices grew by 10.8% in the 12 months to December 2021. So, if you own a second home, it’s likely that if you sold it now you’d make a larger gain than if you sold it a year ago. As the CGT annual exempt amount hasn’t changed during that time, you could be liable for more tax.

This example clearly shows how your CGT liability could increase in the coming years.

The Income Tax Personal Allowance and higher-rate threshold

The Income Tax Personal Allowance, meaning the amount you can earn without paying any Income Tax, is £12,570 in the 2022/23 tax year, and will remain at this rate until 2026.

So, if your earnings increase during the next few years, you will pay more Income Tax as a result. This is because your tax-free allowance will not rise in the coming four years.

What’s more, the higher-rate Income Tax threshold of £50,270, will remain at this level until 2026.

In light of this, you could more easily pass into a higher tax band, as the threshold will not rise in line with any salary increases you might expect in the coming four years. So, you could end up paying 40% tax on more of your earnings than if the threshold had increased every year.

The Inheritance Tax nil-rate bands

When you pass away, the value of your estate that exceeds £325,000 (the “nil-rate band”) is normally subject to a 40% Inheritance Tax (IHT).

If you are passing your main residence to a child or grandchild, you can normally pass on the first £175,000 of this tax-free too (the “residence nil-rate band”).

The nil-rate band has remained at £325,000 since 2009, while the residence nil-rate band has been at its current level since 2020.

So, it stands to reason that, as the IHT threshold has been at the same level since 2009 (and will remain at this level until 2026), and that asset values such as property and investments will have been rising since 2009, more people are likely to be hit by this tax.

Indeed, IHT receipts have increased significantly in recent years. HMRC report that IHT receipts for April 2021 to February 2022 are £5.5 billion, which is £0.7 billion higher than in the same period a year earlier.

Furthermore, if your estate value was already in excess of the nil-rate bands, you are likely to pay even higher IHT as a result of these freezes.

Get in touch

The various tax allowance freezes could see you liable for more tax over the next few years. To discuss ways you could mitigate these taxes, contact us today.

Email or call 0161 8080200.

Please note

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.

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