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Key taxes are changing as a result of Budget announcements
Chancellor Rishi Sunak’s first Budget came as attention is focused on coronavirus, but what does it mean for your financial health?
There were significant announcements on benefits, tax, and the wider economy.
A tax cut for millions
A tax break from the government regarding national insurance was promised in the Conservative manifesto.
The current threshold sees employees and the self-employed paying contributions once they earn £166 a week, equivalent to an annual salary of £8,632 a year. From April, you start paying when earning £9,500.
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That will mean 500,000 people will no longer have to pay this tax, according to independent economists at the Institute for Fiscal Studies (IFS).
Those still paying will save up to £85 a year on average. The chancellor said it would be just over £100 a year, but that calculation may not include the self-employed.
The IFS says 8% of the gains go to the poorest 20% of working households, so it is those on a decent income who may benefit the most. However, those working in a number of low-paying part-time jobs could see their take-home pay increase significantly.
Another tax to be cut is VAT on digital books, newspapers and magazines.
What happens if coronavirus hits my finances?
Many of the measures aimed to tackle the impact of coronavirus benefit small businesses and so protect some jobs. This has been coordinated with the interest rate cut announced by the Bank of England.
Specific personal finance changes include the chancellor saying all of those advised to self-isolate, even if they do not show symptoms, are to receive statutory sick pay if eligible.
UK employees have already started to get statutory sick pay from the first day off work, to help contain coronavirus. This is paid by the employer, but smaller businesses with fewer than 250 employees can reclaim the cost of paying sick pay for the 14 days of isolation.
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Those who are not eligible for sick pay, particularly the self-employed, will be able to claim Employment and Support Allowance (ESA) from day one of “illness” rather than day eight.
ESA is paid to those who are too sick to work, provided they meet certain conditions. It is worth £73.10 a week, or £57.90 for the under-25s. The complexity of this benefit may mean this change is unlikely to affect a lot of people.
Councils will also have access to a hardship fund to help vulnerable people in their area.
More on Budget 2020
Changes on pensions tax for higher earners
The highly complicated way in which high earners are taxed is set to change. Basically, tax relief on pensions becomes less generous if annual income exceeds £150,000 a year. This has become a problem as the income cap includes the value of pensions earned, not just salary.
Some doctors have been refusing to work extra hours (and earning more) because they were being landed with much bigger tax bills.
They, and other high earners, are currently affected by this restriction once income goes over £110,000. The government has promised this may only kick in once annual income exceeds £200,000.
What about booze and fuel duties?
The duties on alcoholic drinks – beer, wine and cider – are all being frozen. So that means no extra tax on a pint or glass.
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There has been a freeze on fuel duty for a decade, and this will continue for at least another year.
About 60% of the price you pay for fuel is tax – a mixture of fuel duty and VAT.
Duty on cigarettes and cigars will go up by the Retail Prices Index (RPI) measure of inflation plus 2% until the end of this Parliament (usually five years). That is a 27p rise on a pack of 20 cigarettes. Hand-rolling tobacco duty will rise by RPI plus 6% in April.
What else has been announced?
Leaseholders will be able to access grants to safely remove unsafe cladding from flats. Some have told the BBC about how they could not sell owing to the issue.
The 5% rate of VAT on sanitary products – referred to as the “tampon tax” – will be abolished from January. This was trailed by the Treasury at the weekend.
People can put a lot more into tax-free savings for children. The allowance for Junior Isas (Individual Savings Accounts) and Child Trust Funds will be increased from £4,368 to £9,000 in April. However, the typical amount saved is only about £1,000.
Owners of new motorhomes, who were facing a massive rise in vehicle excise duty, will now only face a much lower charge, following a campaign by the industry.
Those working from home, who can claim £4 a week off their income tax bill, will be able to claim £6 from April.
What we already knew
This April, the amount earned before paying 20% income tax will be frozen at £12,500. Also frozen is the £50,000 threshold at which people start to pay the higher 40% rate of income tax.
Practically, that means anyone who gets a pay rise in the coming year may be at risk of paying more than they expected in tax, as the extra wages mean they cross these thresholds.
If you are living in Scotland, you have different income tax rates from the rest of the UK. Changes were announced in the recent Scottish budget.
Other big changes to your finances in April had already been set, including:
- Many working-age benefits which had been frozen for four years. including Jobseeker’s Allowance, Employment and Support Allowance, some types of Housing Benefit, and Child Benefit. will rise in line with the rising cost of living, going up by 1.7%. So, for example, child benefit for the eldest child will go up from £20.70 to £21.05 per week
- Those aged 25 and over will get the National Living Wage of £8.72 an hour, a rise of 6.2%, with younger workers also getting more. This is paid by employers
- The full, new state pension will go up by 3.9% from £168.60 a week to about £175.20 in April. However, most pensioners get the older basic state pension, which is also going up by 3.9%, from £129.20 to £134.25 per week. They may also get a Pension Credit top-up
- Many self-employed people face a higher tax bill from April, when the so-called IR35 rule is extended to the private sector. That could mean thousands of contractors and freelancers will pay more tax
- The gradual process allowing people to pass on property to their descendants free from some inheritance tax will enter its final stage of introduction. It will reach its target by 2021