Planning & Budgeting

How will the 2021 budget impact over 50s?

As expected, today’s budget was dominated by Covid and the subsequent impact on the UK economy. Even though much of the Chancellor's plans were leaked to the press, we now have clarity and confirmation. While we await further details and further feedback on Chancellor Rishi Sunak’s budget, this is what we know so far.

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How will the 2021 budget impact over 50s?
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As expected, today’s budget was dominated by Covid and the subsequent impact on the UK economy. Even though much of the Chancellor's plans were leaked to the press, we now have clarity and confirmation. While we await further details and further feedback on Chancellor Rishi Sunak’s budget, this is what we know so far.

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Taxation

It was no surprise to see that there was a degree of “fiscal drag” introduced with regards to personal income tax allowances. This had been flagged in the newspapers ahead of today’s budget but the period over which allowances will be frozen surprised many:

  • The personal income tax allowance will be frozen at £12,570 in England, from 2022 to 2026
  • The higher rate of income tax in England will also be frozen for the same period at £50,270

As demonstrated in our recent article, this subtle freezing of personal income tax allowances by the “fiscal drag” method will result in higher individual tax payments. The fact they are frozen for a total of five years increases this impact. It is also worth noting that there have been no changes in the actual income tax rate for basic rate, higher rate and the additional rate taxpayers.

The impact on an individual currently earning £12,570 per year with a 3% annual increase in salary would be as follows:

YearIncomeTax allowanceTaxable incomeTax paid at 20%
2022£12,570£12,570£0£0
2023£12,947£12,570£377£75
2024£13,335£12,570£765£153
2025£13,735£12,570£1165£233
2026£14,147£12,570£1577£315

When you hear that the Chancellor has "done nothing" with income tax rates or income tax allowances, the automatic assumption is that everything stays the same. As you will see in the above table, even someone on a relatively low income would be paying an additional £315 a year in taxation by the tax year 2025/26.

Furlough

More people in the UK are now struggling to make ends meet as they approach retirement age. As a consequence, many are now forced to consider extending their working life. Consequently, today's announcement regarding furlough will impact many people in the over 50s age bracket.

The bullet points of today’s announcement are as follows:-

  • Furlough is to be extended until the end of September 2021
  • The government will continue to pay up to 80% of employees’ wages for those impacted
  • Employers will be asked to contribute 10% in July, increasing to 20% in August and September

There is no doubt that the furlough scheme has secured hundreds of thousands of jobs that would otherwise have been lost. Indeed, unemployment is now expected to peak at 6.5% next year and then fall as the economy continues to recover. Earlier forecasts had suggested unemployment would peak at a staggering 11.9%.

Personal pensions

Before the budget, there was speculation that the Chancellor was looking to introduce a flat rate of tax relief on pension contributions. While there was no mention of such a move in today's budget, there remains speculation of further short- to medium-term changes. However, what the Chancellor did announce today was a freezing of the lifetime allowance.

In simple terms, the lifetime allowance, currently £1,073,100, is the maximum allowance for pension tax relief. This has traditionally increased year-on-year by the rate of inflation, with those exceeding the allowance paying tax on the excess. A freezing of the allowance until April 2026 will introduce another degree of "fiscal drag."

Some estimates suggest that up to 10,000 pensioners could be drawn into the tax net due to the move. This comes when inflation is expected to rise gradually over the coming years in line with the forecast economic recovery. To maintain relative spending power, your investments need to increase in line with inflation each year. Those who manage to do that will now be penalised if they go over the frozen lifetime allowance.

We have not seen any announcement regarding the triple lock guarantee associated with the state pension. This will be a relief to many in retirement.

Property market

As expected, the Chancellor announced an extension of the stamp duty holiday for property purchases up to a value of £500,000, up to the end of June. This will be followed by a tapering in relief until 30th September, at which point the rate will have returned to £250,000. However, it was the introduction of a new mortgage guarantee scheme that caught the eye for many.

The details of the scheme are as follows:-

  • The scheme will cover 95% mortgages for both existing homeowners and first-time buyers
  • These will be available for properties costing up to £600,000
  • Buyers will be allowed to fix their initial mortgage rate for a minimum of five years

Over the last few years, we have seen a gradual reduction in 95% mortgages available in the UK. Indeed, this type of high-risk mortgage was actively discouraged by the UK government and the regulatory authorities. The government mortgage guarantee scheme will protect mortgage lenders from losses. It is effectively a gamble that the UK property market will remain buoyant.

There is no doubt that this will encourage greater interest in UK property, create significant competition, and support the market.

Outlook for the economy

The outlook for the UK economy in the short to medium-term will significantly impact any future changes in tax rates, tax allowances, and tax relief. It is fair to say that the short to medium-term outlook for the UK economy has improved significantly since the introduction of the Covid vaccine programme.

The bullet points from today's budget include:

  • A forecast that the UK economy will return to pre-Covid levels sometime in 2022
  • Annual economic growth expectations are currently 4% for 2021 and 7.3% for 2022
  • Total government borrowings in the 2020/21 tax year will hit a record £355 billion
  • Government borrowings for the tax year 2021/22 are forecast to be around £234 billion

While the devil is often in the detail when it comes to budget day, with further information published later, it would appear the Chancellor is banking on a strong economic recovery. Aside from the introduction of various elements of "fiscal drag," there has been no increase in tax rates. From a monetary and political perspective, it is much easier to introduce tax increases when the economy is buoyant.

Were there any surprises in today’s budget?

In a word, no. As we have seen in recent years, much of the detail of today's budget had already been leaked to the press. Perhaps the biggest surprise was no increase in income tax rates. However, the subtle "fiscal drag" policy was evident in various areas. Additional investment in the UK economy, via furlough and various other business rate reliefs, should help avoid the worst-case unemployment scenario.

The Chancellor will be hoping that this additional investment will create a very different economic environment going forward. An environment in which tax rises would be more palatable and better received by the electorate. In the meantime, a freezing of alcohol duties might allow us to enjoy a tipple this evening?

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