Much of the focus of Chancellor Rishi Sunak’s second Budget was on protecting jobs and livelihoods and supporting economic recovery in these ‘unprecedented’ times. From a pensions perspective, there was no major overhaul of the pensions tax regime, although the Lifetime Allowance (LTA) has been frozen in what has been described as a ‘stealth tax’.
The main headlines, including some changes announced prior to the UK Budget that also take effect in the new tax year, are:
- The Coronavirus Job Retention Scheme (CJRS) will be extended to September 2021.
- The Lifetime Allowance will remain at the current level of £1,073,100 until 2026.
- The pensions annual allowances remain unchanged.
- There are no changes to rates of income tax and pensions tax relief.
- The standard personal allowance and UK higher rate tax threshold will increase from 6 April 2021, as outlined in November 2020, but will then remain frozen until 2026.
- In Scotland, rates of income tax will remain the same, with a simple CPI uplift to some of the thresholds, as announced in the Scottish Budget in January 2020.
- The State Pension will increase by 2.5%, a £4.40 a week increase for those eligible for a full State Pension.
Extension of the CJRS
The Chancellor confirmed that the CJRS, which was due to end on 30 April, will continue until the end of September. There had been indications that the scheme could be extended beyond April, perhaps to June, but unexpectedly this will now be in place well beyond the point when all Coronavirus restrictions are due to be lifted.
Furloughed employees will continue to receive 80% of salary, capped at £2,500 a month, for hours not worked. As is currently the case, employers will be required to meet the cost of employer pension and national insurance contributions for both hours not worked and, if on partial furlough, hours worked.
From July, employers will also be asked to contribute towards the cost of furlough pay, initially at 10%, increasing to 20% in August and September.
As expected, after leaked reports last week, the LTA has been frozen for the remainder of this Parliament. The Chancellor confirmed the LTA will remain at its current level of £1,073,100 up to and including tax year 2025/26. It had been expected to rise to £1,078,900 in 2021/22, in line with 0.5% Consumer Prices Index (CPI) inflation.
It is estimated that this move will generate £300m a year by 2025/26. Should the Government choose to freeze the LTA for longer, it is likely to start generating much more.
Although the freeze is only likely to affect a relatively small number of pension savers initially, a prolonged period of no inflationary increases will mean that more and more individuals may face LTA charges.
With tax charges of up to 55% payable on any excess above the LTA, individuals potentially impacted by this may want to seek advice around their options.
There were no changes announced to the annual allowances. The standard annual allowance will remain at £40,000, the money purchase annual allowance will continue to be £4,000 and there are no changes to the tapering of tax relief for high income individuals.
Rest of the UK
The income tax Personal Allowance will rise in line with CPI as planned from £12,500 to £12,570 from April 2021, but will then remain at this level until April 2026. The higher rate tax threshold will also increase as previously announced from £50,000 to £50,270 from April 2021 and will also then remain frozen until April 2026.
Maintaining these figures at 2021/22 levels will bring in a significant amount of cash to the Treasury, generating £8bn a year by 2025/26. It is estimated that 1 million more people will pay a higher rate of income tax and 1.3 million people will have to start paying income tax as a direct result of these changes.
Politically however, freezing thresholds rather than increasing rates allows the Conservatives, technically speaking, to claim there is no increase in the rate of income tax, meaning they are not breaking their manifesto commitments.
The Scottish Government is able to set income tax rates and bands, excluding setting the Personal Allowance, which remains reserved and is set by the UK Government.
As announced in the Scottish Budget in January, there will be no changes to the Scottish rates of tax. All the bands will increase in line with CPI, apart from the top rate which will remain frozen in cash terms.
Income tax rates and bands
Rest of the UK
|Up to £12,570
|Over £12,570 – £50,270
|Over £50,270 – £150,000
|Up to £12,570
|Over £12,570 – £14,667
|Over £14,667 – £25,296
|Over £25,296 – £43,662
|Over £43,662 – £150,000
*The Personal Allowance is reduced by £1 for every £2 of income above £100,000. It can go down to zero.
As previously announced and legislated for in February 2021, National Insurance thresholds will rise in line with CPI for 2021/22. This will again bring the Upper Earnings Limit (UEL) in line with the ‘rest of the UK’ higher rate income tax threshold. The UEL will then remain aligned with the higher rate tax threshold at £50,270 until April 2026. All other National Insurance thresholds will be considered and set at future fiscal events.
There is no change to National Insurance rates.
National insurance thresholds
|Class 1 national insurance thresholds
|Tax year 2021/22
|Lower earnings limit
|£120 per week
£520 per month
£6,240 per year
|£184 per week
£797 per month
£9,568 per year
|£170 per week
£737 per month
£8,840 per year
|Upper Earnings Limit
|£967 per week
£4,189 per month
£50,270 per year
Government will consult again on DC investments and charge cap barriers
As part of its Budget and Plan for Growth, also published on 3 March, the Treasury said it wanted to encourage pension schemes to invest in ‘high-growth companies’ and would seek to make it easier to do so under the current charge cap of 0.75%. The charge cap applies to the default arrangements of defined contribution (DC) workplace pension schemes used for automatic enrolment.
The plan notes that UK companies can still struggle to access capital, and that there remains ‘a largely untapped pool of capital from institutional investors’, particularly DC pension schemes.
Given the above, the Government is intending to consult within the next month on whether certain costs within the charge cap affect pension schemes’ ability to invest in a broader range of assets. This is to ensure pension schemes are not discouraged from such investments and are able to offer the highest possible returns for savers.
It follows a Department for Work and Pensions review, published in January 2021, which looked at the measurement of performance fees and any inhibiting factors of the charge cap to less liquid asset classes.
The 2.5% increase to the State Pension means anyone eligible for a full State Pension will see their weekly payments increase from £175.20 to £179.60 from 6 April.
Those entitled to the older basic State Pension will see their weekly payments increase from £134.25 to £137.60, also a 2.5% increase from April.
Bear in mind the minimum State Pension age has recently increased and is now age 66 with further increases planned.