From Income Tax to Inheritance Tax, various tax threshold freezes have been announced, and they are set to last until 2026. The Chancellor confirmed his decision in the House of Commons last Wednesday, setting out how fiscal drag will be used to cover some of the costs of the coronavirus pandemic.
It means over time, the amount of tax a person pays could potentially increase, despite the tax rates not changing.
As well as these changes, Britons should be aware that some basic rate taxpayers are potentially set to be impacted by another tax charge.
This issue relates to Child Benefit, but it’s not necessarily the person claiming this payment who will be hit by the charge.
The High Income Child Benefit tax Charge (HICBC) may need to be paid if a person has an individual income over £50,000 and either:
- They or their partner get Child Benefit
- Someone else gets Child Benefit for a child living with them and the other person contributes at least an equal amount towards the child’s upkeep.
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It doesn’t matter if the child which lives with the person isn’t their own child.
Ahead of the tax freezes, in April, the tax thresholds are changing.
It means the tax-free Personal Allowance will rise from £12,500 to £12,570 – where it is to remain until 2026.
The higher rate tax threshold, which follows the basic rate tax threshold, currently stands at £50,000.
This will rise to £50,270 on April 6, 2021 though.
Sarah Coles, personal finance analyst at Hargreaves Lansdown, has discussed how it means some basic rate taxpayers could now face the “high income” Child Benefit charge.
“The £50,000 threshold at which parents start to lose their Child Benefit is still in place,” she said.
“This means some basic rate taxpayers will have to complete tax returns and repay the benefit as soon as one of the parents earns over £50,000.
“Once a parent earns £60,000 they have to repay it all, so working parents (who both earn over the NI threshold so they don’t need the NI credit) can opt not to receive it at all.”
Addressing tax policies in the Budget in general, Ms Coles added: “If you were wondering what to spend your lockdown bonus on, the government has an idea: higher taxes.
“They shouldn’t come as a huge surprise. It was the over-riding message of the Budget.
“However, you’d be forgiven for thinking that you’ll only start to notice the changes very slowly, and often only in a year’s time when key thresholds have been frozen.
“The real stealth taxes coming next year aren’t the ones that were announced in the Budget, they’re the myriad of other thresholds and allowances which haven’t budged at all, and in some cases haven’t moved in so many decades that they’re practically fossilised.
“Meanwhile, everything from rising house prices to inflation is propelling us at speed over thresholds and into higher tax territory.
“It means it’s worth taking steps to avoid paying more than you have to in tax.
“Everything from taking advantage of your ISA and pension allowance to planning for tax with your spouse and considering salary sacrifice could help bring your tax bill under control.”