In last year’s Budget, chancellor Rishi Sunak unveiled a set of allowance freezes that came into effect in April. Learn how the freezes could affect your money.

In last year’s Budget, chancellor Rishi Sunak unveiled four key allowance freezes that will remain in place until 2026. These freezes have recently come into effect at the start of the 2022/23 tax year.

This “big freeze” has been placed on:

      • The Capital Gains Tax annual exempt amount
      • The Income Tax Personal Allowance and higher-rate threshold*
      • The pensions Lifetime Allowance
      • The Inheritance Tax nil-rate bands.

Sunak’s freezing of these allowances means you could pay higher tax over the coming years, so it is important to understand what each of these allowances is, and how your wealth could be affected.

Indeed, maximising your tax efficiency might be on your mind at the moment, as the cost of living crisis continues to have an impact on UK households. Inflation reached 7% in March 2022, and is forecast to continue rising as the year goes on.

Read on to find out about how the freezing of these allowances could affect your money, and how your Kellands financial planner could provide guidance on working within them.

1. The Capital Gains Tax annual exempt amount

Capital Gains Tax (CGT) is applied to profits you earn from selling assets, including:

      • Assets worth more than £6,000, with the exception of your personal vehicle
      • Any property that isn’t your main residence
      • Shares that aren’t in an ISA or PEP
      • Business assets.

Fortunately, there is an annual exempt amount, within which you will pay no CGT on assets you sell. This allowance will remain at £12,300 a tax year until 2026.

For example, if you made profits on £12,000 worth of taxable assets in any given tax year, you typically won’t pay CGT. However, if you made profits of £15,000 on the sale of assets, you could pay CGT on the profits that exceed the annual exempt amount.

Remember: CGT applies to any non-ISA investments such as shares, ETFs, or unit trusts. In addition, you will potentially pay CGT on assets like your second home, jewellery, and artwork.

Because the annual exempt amount will remain frozen at £12,300, and your assets are likely to increase in value in the coming years, you will pay increased CGT if you sell them.

Working with your Kellands financial planner can help you understand how much CGT you are likely to pay on taxable assets, so you can prepare for this liability and decide how best to proceed when you sell.

2. The Income Tax Personal Allowance and higher-rate threshold

When it comes to Income Tax, it is understandable that you may want to lessen your liability as much as you can.

However, in the next four years, you could pay higher Income Tax if your salary increases. This is because the Income Tax Personal Allowance will remain frozen at £12,570 a tax year until 2026.

So, if you receive a pay increase within that timeframe, you will pay further Income Tax as a result, as the allowance will not increase in line with your income or inflation.

In addition, the higher-rate threshold* will remain at £50,270 until 2026. This means you could more easily pass into a higher tax band if your earnings rise in the next four years – or more of your earnings could be taxed at this higher rate.

Your Kellands financial planner can cast an expert eye over your earnings, and together you can assess your income and consider how to work with these freezes in the next four years.

3. The pensions Lifetime Allowance

The Lifetime Allowance (LTA), which dictates how much you can pay into your pension pot over your lifetime tax-efficiently, has been frozen at £1,073,100 until 2026.

If you exceed the LTA, the value of your pension could be subject to a 55% tax charge if you take it as a lump sum, or a 25% charge if you take any excess as income.

The good news is, you can still save more than £1 million into your pension tax-efficiently over the course of your lifetime.

Unfortunately, though, your pension is more likely to exceed the LTA in the next four years, as it is likely to continue appreciating in value, while the allowance remains frozen.

Indeed, LTA charges have increased steadily since its inception. According to government data, when it was first established in 2006, the LTA stood at £1.5 million, and a total of 760 charges were paid in the same tax year. By comparison, there were more than 4,000 LTA charges in the 2017/18 tax year.

In addition to your active pension contributions potentially exceeding the LTA before 2026, your pension’s compound growth could tip it over the edge of this allowance too. If your pension is nearing the LTA already, now is the time to act.

If you are concerned about paying a high tax charge as a result of exceeding the LTA, speak to your Kellands planner for guidance. We can support you by suggesting alternative savings options, and help protect your pension from this allowance freeze in the coming years.

4. The Inheritance Tax nil-rate bands

When it comes to estate planning, you need to consider how much Inheritance Tax (IHT) your beneficiaries are likely to pay. IHT is usually charged at 40%.

When discussing your inheritance plans with your financial planner, you should consider the IHT nil-rate bands, and how they might affect your wealth if you pass away in the next four years.

There are two key bands to understand when it comes to IHT:

      • The nil-rate band of £325,000, which is the amount your beneficiaries can inherit without paying IHT.
      • The residence nil-rate band of up to £175,000 per individual, which is the property value (as long as the property is your main residence) you can pass onto the next generation without paying any IHT.

The nil-rate bands are frozen at these amounts until 2026.

So, if the value of your estate continues to increase each year, your estate may pay more IHT when you pass away, as the tax-free allowance will remain fixed for the next four years.

A Kellands financial planner can offer suggestions that could help you mitigate the amount of IHT your estate is due to pay, in spite of these allowances being frozen. For example, you could form a “giving while living” strategy that might help you reduce the value of your estate before you die.

Get in touch

If you are concerned about how these allowance freezes will affect your wealth over the coming years, you aren’t alone. Working with your Kellands planner can help provide invaluable peace of mind as you encounter new financial challenges in the years ahead.

For friendly, professional financial support, email us at hale@kelland.co.uk, or call 0161 929 8838.

Please note

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

*Please note that Scotland has different tax rates and bands. The figures in this article apply to the rest of the UK only.

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