Budget 2021- Sunak Freezes Allowances but Avoids Tax Hike

With borrowing approaching a record £400 billion, an unemployment rate of 5.1% and rising, this Budget was never going to be a giveaway for the taxpayer. Sunak balanced freezing of tax allowances, without increasing personal tax rates, to leave consumers with money to spend to get the economy moving again. A sort of buy now pay later deal.

The need for further tax rises later in this Parliament will depend upon the strength of the economic recovery once lockdown eases. Those with savings and investments, expecting increases in tax rates or huge reductions in allowances, have reasons to be cheerful for now.

Frozen Allowances

The freezing of tax allowances for income tax, capital gains, inheritance tax and pensions savings until 2026 may not matter much in the short term as inflation is currently low at 0.7%. Yet if the economy rebounds, economists expect it to rise rapidly. What that means for taxpayers is: -

  • Every year more tax will be due from rising incomes.
  • Gains made on taxable investments will not be inflation protected,
  • More estates will pay more tax, and
  • The amount which can be tax sheltered in a pension will fall in real terms.

 The impact of a 2% inflation rate, which is the Bank of England’s target rate, would reduce the value of the frozen allowances as follows:

Tax Allowance

Allowance 2021 £

Allowance 2026 after inflation adjusted @ 2% £

Zero rate income tax



40% income tax threshold



Capital gains allowance



Inheritance Tax Allowance



Pension Savings Allowance




Strategies for Preserving Family Wealth

Individuals may need to employ more strategies and use a wider variety of savings vehicles to help their money maintain its net of tax buying power. That may mean using some of the allowances and reliefs which have perhaps been neglected during two decades of relatively low taxation.

This could include: -

  • Stripping growth out of taxable investments on an annual basis so that the £12,300 capital gains tax allowance is used each year.
  • Reinvesting gains in tax exempt Individual Savings Accounts and pensions
  • Making regular pension savings to reduce the income tax payable
  • Making lifetime gifts to family members within the annual exempt amount or taking advantage of the more generous exemption for gifts out of surplus income.
  • Making larger capital gifts as potentially exempt transfers, which after 7 years fall outside of the taxable estate
  • Exploring the use of other family members allowances and reliefs and changing ownership of assets to lower taxpayers,
  • Creating a retirement planning strategy which makes use of a variety of investment vehicles to provide a retirement income
  • Planning the distribution of your estate with the help of wills, life assurance and assets which offer inheritance tax exemptions and reliefs.

The success of the Chancellor’s balancing act depends upon the impact of vaccination on the ability of the economy to fully reopen in the Summer, for businesses to make profits, giving a rising corporation tax take from 2023. Should that be derailed, tougher personal tax measures, as rumoured before this Budget, and set out by the Office for Tax Simplification, may be brought forward. While we may hope that won’t be necessary, taking the opportunity to plan family finances within current tax rules and allowances would be prudent.

Aspira is here to help and for personal advice on how the Budget affects you please  please contact your usual Aspira adviser or email info@aspirafp.co.uk or telephone 01454 632 495.

Kay Ingram
Director of Public Policy
March 2021

Please remember, no news or research item is a recommendation or advice to buy. Aspira Corporate Solutions is not responsible for accuracy and may not share the author’s views. The contents of this blog are for information purposes only and do not constitute individual advice. All information is based on our current understanding of taxation legislation and regulations. The Financial Conduct Authority does not regulate estate planning, tax advice, wills or trusts. 

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