Earlier this month Chancellor Rishi Sunak announced a number of tax allowances will be frozen to help pay off the debts incurred by the coronavirus pandemic.
These new ‘stealth taxes’ will raise billions, without directly increasing charges for taxpayers. As the economy bounces back and the cost of goods and services increases, more people will see their tax bill increase.
Income Tax
The income tax personal allowance threshold typically increases year on year in line with inflation. However, this year will be the last year it increases before being frozen until 2026.
The current threshold for basic rate taxpayers is £12,500, which will increase to £12,570 in April. The higher rate threshold is currently £50,000, this will increase to £50,270 in April.
As wages are forecast to increase by 2% this year, the tax bands will lag behind the growth of earnings.
Pension Taxes
People could be facing tax charges of up to 55% on their retirement savings if they exceed the lifetime allowance of £1,073,100. Similar to the income tax allowance, the lifetime allowance will be frozen until 2026.
According to the pensions firm Royal London, more than a million people are set to lose out as growth in the market is expected to push savings pots over the threshold.
Child Benefit Tax
As the income tax personal allowance increases to £50,270 for higher rate taxpayers, the threshold over which the benefit is adjusted will remain at £50,000. This will result in some basic rate taxpayers having to repay some or all of the child benefit they have received.
Inheritance Tax
Over the next five years, families will be hit with a £1bn inheritance tax raid, whilst thousands more will pay the 40% tax duty.
As protections against the tax remain frozen until 2026, rising house prices and the higher death toll, due to Covid-19, will mean more people are required to pay the 40% tax duty.
The current exemption stands at £325,000, a figure that has not changed since 2009. If this rate had gone up with inflation the exemption would stand closer to £450,000. This has resulted in more people being caught in the tax net every year.
Council Tax
Council taxes are expected to rise by as much as 5%, plus an extra £5 for local policing. This could see average houses in band D pay an extra £106, taking the annual amount up from £1,818 to £1,924 next year.
Stamp Duty Land Tax
The stamp duty land tax holiday has been extended until the end of June for homes of up to £500,000. After June, the threshold will decrease to £250,000 until the end of September, after this it will then revert back to the original threshold of £125,000.
As house prices have risen by 8.5% in the last year, many are expected to be hit with stamp duty tax when the threshold reverts to its normal level.
Capital Gains Tax
The capital gains allowance will remain frozen at £12,300 for the next five years. Investors and second-home owners selling assets will pay £65m more in tax on the profits made. A lower threshold means paying more tax on those profits as inflation will have an effect on pricing.
