Budget 2021 – The Big Freeze on Personal Tax Allowances

Budget 2021 Personal Taxes

The Budget 2021 and the big freeze on personal tax allowances!

The UK Budget was announced on Wednesday 3rd March 2021. Many had expected tax rises to pay back the deficit caused by the pandemic. Although many tax rises were avoided, the big freeze on tax free allowances over the next 5 years will effect millions.

We go through the key announcements from the budget below. It includes how the budget will affect individuals and the personal taxes that they pay.

For information on how the budget 2021 will affect businesses see Budget 2021 – The Key Points on Business Taxes.

Personal Tax announcements in Budget 2021

Below are the main personal tax announcements:

What is the new personal allowance for 2021/22?


The personal allowance is set to increase from the current rate of £12,500 to £12,570. This will remain unchanged until 2026.

The freezing of the personal allowance will have the effect of taxing many more individuals. Especially in 5 years time after taking into account the inflation of income over this period.

The most common tax code for 2021/22 will be 1257L – How to check your tax code is correct?

How much do you need to earn to lose your personal allowance?


Individuals with income over £100,000 suffer a loss of the personal allowance. The reduction is £1 for every £2 on income in excess of £100,000.

For the tax year 2021/22 it will mean that no personal allowance is available for anyone earning in excess of £125,140.

Is the marriage allowance still available?


Yes. The marriage allowance allows certain couples to transfer 10% of their personal allowance to their partner. It saves tax of approx. £250 per annum.

With the freezing of the personal allowances over 5 years, it is to be expected that fewer couples will qualify for this tax relief.

For further information and how to claim the marriage allowance.

What is the basic rate band for 2021/22?


The basic rate band will increase from £37,500 to £37,700 in April 2021. This has also been frozen until 2026.

As a result it means that the higher rate of tax will now commence for income over £50,270 (In 2020/21 it was £50,000).

The additional rate band remains the same at income over £150,000.

At what earnings does child benefit tax charge threshold commence?


The high income child benefit tax charge remains at £50,000 for 2021/22. This is unchanged from last tax year.

As a result, basic rate taxpayers will now be caught by the charge. (n.b Previously it was aligned with the higher rate of tax but in 2021/22 the higher rate will be from £50,270)

What are the taxes on savings income for 2021/22?


These remain unchanged:

– Basic rate taxpayers have a tax free allowance of £1,000.
– Higher rate taxpayers have a tax free allowance of £500.
– Additional rate taxpayers have no tax free savings allowance.

What are the taxes on dividends for 2021/22?


These remain unchanged:

– First £2,000 is tax free. This is the dividend allowance available to all taxpayers.
– Basic rate taxpayers pay dividend taxes at 7.5%.
– Higher rate taxpayers pay dividend taxes at 32.5%.
– Additional rate taxpayers pay dividend taxes at 38.1%.

What are the taxes on capital gains for 2021/22?


Prior to the budget 2021 speech, there were many predictions that the taxes on capital gains would be increased significantly. This proved to be incorrect.

There have been no significant changes to the capital gains tax rules.

The annual exemption remains at £12,300. This will remain unchanged until 2026. Profits in excess of the exemption are taxed at 10% for basic rate taxpayers and 20% for higher rate taxpayers. Certain gains, namely residential properties are taxed at 18% and 28% respectively.

Has the minimum wage increased?


Yes. The minimum wage is set to increase on 1 April 2021.

The main announcement is that those aged 23 and 24 years old will now qualify for the higher National Living Wage (NLW). Previously the NLW was only available for those over 25 years old. The NLW is to increase to £8.91 per hour.

For the full rates see National Minimum Wage – the new rates from April 2021.

What is the Optimum Directors Salary for the 2021/22 tax year?


The optimum salary for Directors from April 2021 will be £8,840 per annum.

For the full details see our blog on Optimum Directors Salary 2021/22.

DISCLAIMER – Please note that the content contained in this article is for general information only and is not a substitute for professional advice – read our full disclaimer

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