In Chancellor Rishi Sunak’s spring 2021 Budget, the decision was made to freeze certain tax thresholds and allowances. Although the government chose to not raise tax rates, the decision to freeze these tax thresholds meant that many people would end up paying more income tax.
The tax freezes have led to an increase in the number of taxpayers and higher rate taxpayers across the UK, with the implementation of these freezes having a huge impact on the amount of tax people are accountable for due to rising inflation.
As a result, inflation has affected many families and their finances. This has highlighted the importance of tax planning for families and the benefit of considering your income as a couple to help you to avoid incurring additional taxes.
Which thresholds and allowances were frozen?
In the spring Budget, the Chancellor announced that certain thresholds and bands would not change until April 2026, including:
- The personal allowance – £12,570
- The higher rate threshold – £50,270 outside Scotland
- The capital gains tax annual exempt amount – £12,300
- The standard pension lifetime allowance – £1,073,100
- The inheritance tax nil rate band (£325,000) and residence nil rate band (£175,000)
What is the impact of the tax threshold freeze?
Since 2010/11, the starting point for additional rate tax has been £150,000. By introducing a freeze on the tax threshold, especially with prices forecast to rise faster in the short term, it has resulted in many additional people crossing the threshold to become taxpayers (or even higher rate taxpayers).
Freezing the tax thresholds and limits that are subject to automatic inflation-linking is in practice tantamount to introducing a stealth tax. When freezing the inflation-linked tax thresholds, the government expected an extra 1.3 million people to pay income tax by 2025/26 due to rising inflation, with 1 million also forecast to become a higher rate taxpayer.
What does this mean for families?
The freezes will have an eroding effect, meaning that many couples who have never had to think about their tax planning, will now need to consider their tax jointly, as:
The high-income child benefit charge only applies if one or either of a child’s parents, or adults in the child’s household (married or not), has an income exceeding £50,000 – a figure unchanged since January 2013. When combined with higher tax rate, a two-child family would reach a marginal tax rate of up to 58.3% (59.3% in Scotland).
One way to avoid becoming liable for high income tax is to acknowledge your investment income. In doing so, couples can rearrange ownership of investments and avoid reaching the £50,000 higher rate threshold.
- Charitable gifts that qualify for gift aid will receive a basic rate relief, which means that an £80 net gift would be worth £100 to the receiving charity. However, as a higher and additional rate taxpayer, you can claim an extra personal tax relief. This would equate to £20 relief on the same £80 gift. Therefore, couples should make joint decisions on which partner should make the gift.
- Married couples and civil partners can transfer assets to offset gains and avoid paying capital gains tax. Each partner has a capital gains tax (CGT) allowance of £12,300, so if you make a capital gain of £15,300 in a tax year and your partner makes a loss of £3,000, you will have to pay a CGT charge on the loss (even though your joint net gains match the annual exemption). However, if your partner transferred their loss-making asset to you and then you sold it, the loss could offset your gain.
Capital gains tax exemptions don’t apply to couples that are not married or in a civil partnership – the transfer of shares would crystallise the loss.
KLO Financial Services
At KLO Financial Services, our financial advisers can help you reduce the amount of tax your pay through tax efficient planning, by identifying effective ways to reduce tax liability by utilising the available exemptions.
Would you benefit from expert advice on tax efficient planning? Get in touch with our team to find out how we can support with your family tax planning on 01926 492 406 or by emailing firstname.lastname@example.org.