This Budget was in many ways a landmark event; it provided the forum for Chancellor Rishi Sunak to set out a strategy to get the UK economy back on track after Covid-19.
He said, “We cannot draw a line under Covid, but we can prepare for a new, post-Covid economy and renewed optimism – this Budget is the foundation.” According to government data, employment levels are up, investment is growing, wages are rising, and economic activity forecasts have been revised upwards – expected to hit 6.5% this year and in the coming months.
A major implication of this budget will be the effect of fiscal drag, because tax allowances are largely frozen, but wages and the cost of living are rising. The personal income tax allowance will stay at £12,570 from April 2022, and each subsequent year until 2025/26, whilst the higher rate threshold will be frozen at £50,270. As pay increases, more people will be pushed over these thresholds and will be paying more tax. At the same time, prices are rising, so disposable income will be pinched.
The allowance freezes are having the same effect on capital gains tax, pensions, and inheritance tax; the annual capital gains tax exemption remains at £12,300; the pension lifetime allowance remains at £1,073,100; and the inheritance tax nil rate band and residential nil rate band remain at £325,000 and £175,000 respectively. Yet asset values are rising sharply in value, so tax receipts are also rising fast, because more people are pushed into these thresholds too.