As the Treasury seeks to recoup costs after a long period of pandemic-induced government support, we highlight three areas that could see tax reforms. Tax review outcomes and announcements are uncertain, but potentially reduced tax privileges or a greater tax burden may be on the horizon.
What to watch out for tax horizon
The pension lifetime allowance (LTA) – the threshold for the total amount you can save into your private pension pot without incurring an excess tax charge – is £1,073,100. If it is exceeded, you can face a tax bill of up to 55% on the excess value. The LTA ceiling was frozen until April 2026 in the Chancellor’s Spring 2021 Budget, although it should rise in line with inflation after this date. However, the Treasury could go a step further and reduce the LTA threshold to £900,000, or even £800,000. The LTA has been reduced three times in the past decade (see graph below). Savers with large pension pots and continuing high contribution rates should keep an eye firmly fixed on this area.
Pension contributions
The standard annual allowance for what most people can contribute to a pension is £40,000 a year. Pension contributions attract tax relief at your marginal tax rate (20%, 40% or 45%), up to certain limits. Those earning between £100,000 and £125,140 can benefit from 60% tax relief. The Chancellor could implement a flat tax relief rate of 25% (although figures of 20% and 30% have also been mooted). Under a 25% flat rate, basic rate taxpayers would receive a slight boost, but the move would hit higher and additional rate taxpayers, who would see their rate relief savings curtailed, adding substantially to tax bills in some cases.
Capital Gains Tax
Capital Gains Tax (CGT) is a tax on the profit when you sell, or dispose of, an asset that has increased in value. It’s levied on assets including property that’s not the main home, investment accounts, and most personal possessions worth over £6,000. Basic rate income taxpayers pay CGT at 10% (18% for residential property), while higher or additional rate taxpayers pay CGT at 20% (28% for residential property). Aligning some (or all) CGT assets with income tax bands (20%, 40%, 45%) is one option available to the Treasury, with both basic rate and higher/additional rate taxpayers likely to feel the effects.
Cutting the CGT allowance of £12,300, known as the Annual Exempt Amount (AEA), could also be on the cards in the future. Predictions that the Chancellor would reduce the AEA in the March 2021 Budget did not materialise, but an Office of Tax Simplification review in November 2020 proposed that the AEA be slashed to £2,000–£4,000.
With a potentially tougher tax environment on the horizon, it is wise to take advantage of generous allowances while they last. Doing nothing may lead to higher tax bills.
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This article is for general information purposes only and does not constitute financial advice or a personal recommendation. Past performance is not a reliable indicator of future results. Investments can rise or fall in value, and you may receive less than you originally invested. Tax treatment depends on individual circumstances and may change in the future.
