How will the Budget 2021 affect you and your clients?

4 March 2021
Rishi Sunak delivered his second Budget on Wednesday 3 March 2021.

Listen to Clare Moffat and Fiona Hanrahan from our Intermediary Development and Technical team as they investigate some of the main headlines in the 2021 Spring Budget and consider the impact this could have on financial advisers and their clients.

Hi everyone, thanks for listening to this podcast where we'll consider some of the major announcements in yesterday's Budget. My name's Justin Corliss and I'm joined today by Clare Moffat, who's the Head of the Intermediary Development and Technical team here at Royal London, and Fiona Hanrahan, who's also part of the Intermediary Development and Technical team.

So without further ado, let's get started. We'll begin with the changes to income tax and National Insurance. Clare, what are some of the main headlines advisers should be aware of and may want to make their clients aware of? 

Thanks Justin. So firstly, National Insurance. Now the primary and upper earnings thresholds will rise with CPI in April 2021 to £9,568 and £50,270, respectively. But then this will be frozen until April 2026. Now you're going to hear April 2026 quite a few times in this session. Now when we're thinking about National Insurance, remember, it's always worth checking, especially with your new business owner clients, whether they operate salary exchange, because this can be a real benefit to a business owner as well as the employees.

The personal allowance will rise to £12,570 from April 2021. And again, it's going to remain at that level until April 2026.

Now, that's UK-wide. For non-Scottish tax payers, the amount people will have to earn before they pay higher rate tax at 40% will rise to £50,270 from April 2021. But, then it's going to remain at that level until April 2026.

This amount also applies UK-wide for non-savings and non-dividend income. So a frozen personal allowance and frozen higher rate bands, which is going to mean that lots more people will be paying basic and higher rate tax. Now it's important to remind clients that if they are just into a tax band, then paying a pension contribution can move them back to being a non taxpayer or a basic rate taxpayer. And that has the benefit of that 20% or 40% tax relief.

Now, it's also important for clients in drawdown to think about the amount they're withdrawing if they have been structuring it to fit in with different tax bands and thresholds.

OK, thanks Clare. We know from yesterday's Budget that the lifetime allowance will be frozen at £1,073,100 until 5 April 2026. What do you feel advisers should be discussing with their clients regarding this, Fiona?

Thanks Justin. Yes, the lifetime allowance remaining at £1,073,100 for five years will definitely mean more people will be affected by the charge.

It's estimated that this change will generate around £255 million pounds for the government. In recent years, we've been used to the lifetime allowance increasing by £20,000 to £30,000 each year. So a freeze could certainly alter behaviour. We may see people taking benefits earlier as a result of this or stopping or reducing their contributions. The BMA has warned us of the impact on NHS employees particularly, and decoupling the link between CPI and the level of the lifetime allowance, albeit temporarily, means we will see more people facing a tax charge.

But the question for all those impacted, including our beleaguered NHS staff, should not be how much will my pension tax charge be if I stay in the scheme? But, will the extra pension benefits I and maybe my beneficiaries get be worth more than the cost to me of paying that charge? Now this is a complex assessment and one which has been made immeasurably more difficult where there's little stability in the rules. Building a pension is a long term planning objective, which merits long term tax laws. In the here and now, NHS clinicians and others who feel they may be impacted should consider seeking professional advice to help ensure that any decision to retire or withdraw from their pension scheme is appropriate.

If you have clients close to the lifetime allowance, you may have been using some assumptions in your calculations to determine their levels of pension funding. And this may have to be reviewed as presumably you would have been assuming that the lifetime allowance is due to increase each year in your calculations. And it's also worth remembering that PCLS could be affected as the maximum generally available is 25% of the lifetime allowance when taking benefits. It might be worth revisiting individual protection 2016 if you discounted it because you expected the standard lifetime allowance to be in excess of anything the client could protect, because this may no longer obviously be the case.

In summary then, when it comes to the lifetime allowance, it's essential that this is looked at during the annual review, particularly the higher paid public sector workers, to ensure the client understands the potential impact of this change in the lifetime allowance. Our policy paper, Why paying a tax charge isn't always a bad thing is a very useful document if you're looking for help in this area.

Thanks for that, Fiona. Another headline grabber from the Budget was the increase in corporation tax rates to 25% from April 2023. Clare, could you give me some more detail on this please?

I can, thanks Justin. Now there's a clear need to raise taxes right now. And currently, the UK has one of the lowest rates of corporation tax at 19%. However, the rate for small profits under £50,000 will remain at that 19%. Now, we've been told that there'll be a taper for businesses who've got profits between £50,000 and £250,000 so that they'll pay less than that main rate of 25%. But we're going to need to wait for the detail on this.

Now the Chancellor stated in his speech that the 25% rate would only apply to 10% of businesses.

If you have business owner clients, then this is one to watch out for more detail on. But remember that certain deductions can be made from corporation tax profits, including for pensions and certain protection products, which are for the employees' benefit. And for business owners who have profits near a threshold and are perhaps themselves nearing retirement, then making pension contributions could be a very tax effective way of getting money into their pension and is going to help solve that retirement income need, as well as potentially reducing corporation tax.

Advisers should also note that from 1 April 2021 until 31 March 2023, companies investing in qualifying new plants and machinery assets will benefit from a 130% first year capital allowance. Now this has been called an upfront super deduction and will allow companies to cut their tax bill by up to 25 pence for every one pound they invest.

Thanks Clare. Of course, it's not just the lifetime allowance that's been frozen until 2026. The inheritance tax and capital gains tax thresholds have also been frozen for five years. What do you feel are the main points to consider here?

Thanks Justin. Yes, obviously the IHT threshold freezing will mean more assets being subject to IHT. House prices are still rising, so this could be the main issue for most in this area. This could mean more families will be looking for advice and estate planning will be more commonplace. Pension benefits and passing funds through the generations using drawdown could become even more valuable, as well as making sure you use your exemptions wherever possible. Similarly with capital gains tax, this freeze could mean more people being subject to capital gains tax, who therefore, could be looking for advice in this area. Pension contributions, again, could be useful to reduce the impact of a gain for example, and is always worth considering.

Thanks, Fiona. And looking briefly at stamp duty land tax, the increase in the nil rate band for stamp duty land tax to £500,000 has been extended until 30 June 2021. Clare, could you provide a little more detail on this?

Yes. So stamp duty land tax applies in England and Northern Ireland. As you mentioned, the temporary increase has been extended until the end of June. Until the end of September, it will be £250,000 before returning to the original nil rate of £125,000 on 1 October 2021. Now this is great news for those planning on buying in the short term, as well as those who have existing mortgage applications in the pipeline and who they were thinking that they were going to have an unpleasant tax bill had there not been this extension.

Now, furthermore, with the return of the 95% mortgages, we certainly could be about to see generation rent turning into generation buy as first time buyers find themselves in a better position to get onto the property ladder after a difficult year. These are welcome opportunities for advisers to talk about protection with clients, who should be considering protecting their new home and themselves.

And with the potential to make some significant tax savings, clients might find they're in a better position to talk about protection with their advisers now.

Absolutely. Thanks Clare. And finally, a bit of an open question to whoever would like to take it on. Is there anything else that we should be mindful of?

I'll take it on Justin. A couple of things are certainly worth mentioning here. And firstly, the furlough scheme and the self-employed grants have been extended until the end of September. The furlough scheme currently pays 80% of employees' wage for the hours they cannot work in the pandemic, and employers will be expected to pay 10% towards the hours their staff do not work in July, rising to 20% in August and September. Newly self-employed who had filed a tax return by midnight on 2 March, will qualify for the self-employed grants.

And we've also had confirmation that the self-employed grants are taxable and therefore can be used as a basis for pension contributions. And secondly, the government will consult on whether certain costs within the charge cap affect pension schemes' ability to invest in some kinds of assets. The aim here is to ensure pension schemes are not discouraged from such investments and are able to offer the highest returns possible for savers. Draft regulations will be laid to make it easier for schemes to take up these opportunities within the charge cap, by smoothing certain performance fees over several years. So we just need to watch this space for more information about this.

Thanks Fiona. And skilfully taken on as well, I would say. That's all we've got time for today on this podcast. I'd like to thank everybody for listening and also thank Clare and Fiona for their expert insight into that. If you want any further information, please visit the Technical Central website on the Royal London site, because there is further information on the Budget contained within that. But thank you very much for listening.

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