Rishi Sunak’s budget was met with much relief as the country remained comforted by promises of economic support for the next few months in the wake of the pandemic. This is welcome news as jobs enjoy continued financial assistance and the inevitable rise in taxes is stalled. However, the debt following COVID remains, and this is a bill that ultimately must be paid. The freeze on income tax allowance is but the first tentative step towards hitting the pockets of individuals, bringing more than 1 million people into the tax threshold in the next few years, as well as forcing 1 million more into a higher tax bracket.
With the new round of tax consultations scheduled for March 23, the public can expect to be hit with higher taxes with entities such as capital gains, pensions and property all under the chancellor’s scrutiny.
How does this affect you and your portfolio? The first major consideration is the freeze on contribution allowances to ISAs, Lifetime ISAs, and Junior ISAs. These will all remain the same, despite inflation. In addition, the temporary measure to cut the penalty from early withdrawals from Lifetime ISAs was scrapped. All this can potentially leave investors with a higher tax bill as their tax wrapper fails to keep up with inflation. Sunak has also indicated that this freeze will be a long term solution, continuing until 2026 and potentially casting the gains from portfolios into the grasp of the taxman.
Investors are urged to make the most of their personal allowances now, ahead of any further changes. Families should be utilising ISAs and Junior ISAs in order to protect themselves. Pension contributions should also be maximised up to the allowance, however, high earners should be aware of the freeze on the pensions lifetime allowance, which will no longer be rising with inflation and will potentially be raising £1bn in the next five years. This could lead to an increase in people accessing their pension fund early in order to avoid reaching the Lifetime Allowance.