Budget 2021

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Personal TaxThe personal allowanceThe personal allowance is currently £12,500.Budget 2018 announced that the allowancewould remain at the same level until 2020/21and the statutory provision to increase theallowance annually by CPI was to be overridden.The Chancellor has confirmed that the personalallowance will increase by CPI (0.5%) for 2021/22to £12,570.There is a reduction in the personal allowance forthose with ‘adjusted net income’ over £100,000.The reduction is £1 for every £2 of income above£100,000. So for the current tax year there is nopersonal allowance where adjusted net incomeexceeds £125,000. For 2021/22 there will be nopersonal allowance where adjusted net incomeexceeds £125,140.The Chancellor announced that the personalallowance will be frozen at £12,570 for the taxyears 2022/23 to 2025/26.The marriage allowanceThe marriage allowance permits certain couples,where neither pays tax at more than the basicrate, to transfer 10% of their personal allowance totheir spouse or civil partner.CommentThe marriage allowance reduces the recipient’s taxbill by up to approximately £250 a year. The marriageallowance was first introduced for 2015/16 and thereare couples who are entitled to claim but have notyet done so. It is possible to claim for all years backto 2016/17 where the entitlement conditions are met.The total tax saving for all years up until 2020/21could be over £1,000. A claim for 2016/17 will needto be made by 5 April 2021.Tax bands and ratesThe basic rate of tax is 20%. In 2020/21 the bandof income taxable at this rate is £37,500 so thatthe threshold at which the 40% band appliesis £50,000 for those who are entitled to the fullpersonal allowance.The Chancellor announced that for 2021/22the basic rate band will be £37,700 so that thethreshold at which the 40% band applies willbe £50,270 for those who are entitled to the fullpersonal allowance. The Chancellor announcedthat the basic rate band will be frozen at £37,700for the tax years 2022/23 to 2025/26. TheNational Insurance contributions Upper EarningsLimit and Upper Profits Limit will remain alignedto the higher rate threshold at £50,270 forthese years.Individuals pay tax at 45% on their income over£150,000.Scottish residentsThe tax on income (other than savings anddividend income) is different, for taxpayers whoare resident in Scotland, from taxpayers residentelsewhere in the UK. The Scottish income2 Personal TaxBudget Summary 2021
tax rates and bands apply to income such asemployment income, self-employed trade profitsand property income.In 2020/21 there are five income tax rates whichrange between 19% and 46%. Scottish taxpayersare entitled to the same personal allowance asindividuals in the rest of the UK. The two higherrates are 41% and 46% rather than the 40% and45% rates that apply to such income for other UKresidents. For 2020/21, the 41% band applies toincome over £43,430 for those who are entitled tothe full personal allowance. The 46% rate appliesto income over £150,000.Some individuals qualify for a 0% starting rate oftax on savings income up to £5,000. However, therate is not available if taxable non-savings income(broadly earnings, pensions, trading profits andproperty income, less allocated allowances andreliefs) exceeds £5,000.In the Scottish Budget on 28 January 2021, theScottish Government proposed that the Scottishincome tax rates will be frozen for 2021/22. Thethresholds for the tax bands will be increased by0.5% except for the 46% rate threshold whichremains at £150,000. So the 41% band will applyto income over £43,662 for those who are entitledto the full personal allowance.Welsh residentsFrom April 2019, the Welsh Government has hadthe right to vary the rates of income tax payableby Welsh taxpayers. The UK government hasreduced each of the three rates of income tax paidby Welsh taxpayers by 10 pence. For 2020/21the Welsh Government has set the Welsh rate ofincome tax at 10 pence which has been added tothe reduced rates. This means the tax payable byWelsh taxpayers is the same as that payable byEnglish and Northern Irish taxpayers.The Welsh Government has announced thatthe income tax rate will remain at 10 pence for2021/22.Tax on savings incomeSavings income is income such as bank andbuilding society interest.The Savings Allowance applies to savings incomeand the available allowance in a tax year dependson the individual’s marginal rate of income tax.Broadly, individuals taxed at up to the basic rate oftax have an allowance of £1,000. For higher ratetaxpayers the allowance is £500. No allowance isdue to additional rate taxpayers.Tax on dividendsThe first £2,000 of dividends is chargeable totax at 0% (the Dividend Allowance). Dividendsreceived above the allowance are taxed at thefollowing rates:• 7.5% for basic rate taxpayers• 32.5% for higher rate taxpayers• 38.1% for additional rate taxpayers.Dividends within the allowance still count towardsan individual’s basic or higher rate band and somay affect the rate of tax paid on dividends abovethe Dividend Allowance.To determine which tax band dividends fall into,dividends are treated as the last type of income tobe taxed.Universal CreditUniversal Credit is a single payment that ismade up of different amounts depending onan individual’s circumstances. There is noentitlement if an individual’s capital is worth moreBudget Summary 2021 Personal Tax 3
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Budget 2021

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