The UK economy is under intense pressure due to the effects of the pandemic. So the recent government announcement about the future income tax rate freeze should come as no surprise.
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What are the details?
During Chancellor Rishi Sunak’s 2021 Budget speech, he announced that the personal allowance and higher rate thresholds for income tax will increase by 0.5% from the beginning of the new financial year.
From 6 April 2021, the rates in England and Wales will be as follows:
Personal allowance
Income between £0 and £12,570 will not be taxed.
Basic rate tax band
Income between £12,571 and £50,270 will be taxed at 20%.
Higher rate tax band
Income between £50,271 and £150,000 will be taxed at 40%.
Additional rate tax band
Income of more than £150,000 will be taxed at 45%.
How are things changing in Scotland?
The personal allowance threshold applies to the whole of the UK. However, the Scottish government has the right to adjust its tax thresholds as part of the region’s devolved powers.
From 6 April 2021, the rates in Scotland will be as follows:
Personal allowance
Income between £0 and £12,570 will not be taxed.
Starter rate
Income between £12,571 and £14,667 will be taxed at 19%.
Basic rate
Income between £14,668 and £25,296 will be taxed at 20%.
Intermediate rate
Income between £25,297 and £43,662 will be taxed at 21%.
Higher rate
Income between £43,663 and £150,000 will be taxed at 41%.
Top rate
Income of £150,001 or more will be taxed at 46%.
Crucially, the chancellor also announced that following this increase, thresholds will be frozen for the following five years until April 2026.
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What does this mean for the UK economy?
According to the Office for Budget Responsibility, the UK government’s official independent forecaster, the change in the thresholds will mean an additional 1.3 million people will start paying income tax and one million more will become higher-rate taxpayers.
This will raise an additional £8.2 billion of income for the UK Treasury when compared to the income that would have been raised when only inflation is taken into account.
What does this mean for UK employees?
Critics have complained that the move is a ‘stealth tax’ which will badly hit working Britons over the next five years.
This is because if your wages increase over the next five years, you are likely to be drawn into a higher tax bracket and end up paying more tax.
The same applies to anyone set to retire in the next five years, since 75% of any income you receive from your pension will be subject to income tax.
If you are a higher rate taxpayer, you will not only be charged 40% of your wages. If you have income from any other investments, these will also be taxed at 40%.
Is there anything I can do?
If you have a pension, you can increase your contribution from your wages, which will reduce your income tax bill. You could also start a personal pension. You could receive tax relief from the contributions you make depending on your annual income.
If you can, make use of your ISA allowance. This will protect your savings from further taxes. You can save up to £20,000 tax-free in the new tax year.
Final thoughts
Further information about income tax rates is available from the Budget 2021 section of the gov.uk website.
Please note that tax treatment depends on the specific circumstances of the individual and may be subject to change in the future.
