Income tax

The measure

The Chancellor has confirmed that the income tax personal allowance and basic rate band for 2020/21 will be increased as planned in line with the Consumer Prices Index (CPI) of 0.5%.

Changes to the personal allowance apply to the whole of the UK while the measures announced in respect of rates and thresholds apply only to England, Wales and Northern Ireland.

The personal allowance rises by £70 to £12,570 and the basic rate band (for England, Wales and Northern Ireland) rises by £200 to £37,700, giving a higher rate threshold of £50,270 for 2020/21.

The basic, higher and additional rates of tax will remain at 20%, 40% and 45% respectively for England, Wales and Northern Ireland.

Notably, the higher rate threshold (for England, Wales and Northern Ireland) and personal allowance will be frozen for five years, remaining at these levels until April 2026. 

National Insurance contributions (NICs)

NICs limits for tax year 2020/21 will also rise broadly with the CPI. The primary threshold for employees (above which NICs are payable at 12%) increases from £9,500 per annum to £9,568 and the upper earnings limit (above which the NIC rate is 2%) rises from £50,000 to £50,270 in line with the higher rate threshold. 

Taking account of NICs, a basic rate taxpayer will see an overall saving of £22.16 (income tax saving of £14 and NICs saving of £8.16), and a higher rate taxpayer will see a net saving of £49.16 (income tax saving of £68 and NICs increase of £18.84). Those with income over £125,140 will see a net saving of £21.16 (income tax saving of £40 and NICs increase of £18.84).

As the upper limits for NICs are linked to the income tax higher rate threshold, these are frozen at £50,270 until April 2026. The amount of all other NIC thresholds will be considered in future fiscal events.

Capital gains tax

The annual exempt amount for capital gains tax has been frozen at 2020/21 levels (£12,300 for individuals and £6,150 for trustees and personal representatives), which will be maintained until April 2026.

Other bands and allowances

A number of other bands and allowances were confirmed to remain at existing levels until April 2026, including:

• Inheritance tax nil-rate band (£325,000) and the residence nil-rate band (£175,000)

• Pensions lifetime allowance (£1,073,100)

The savings tax band to which the 0% starting rate applies will remain at its current £5,000 level in the 2021/22 tax year.



Who will be affected?

All individual taxpayers.


When will the measure come into effect?

The measures will take effect from 6 April 2021 and, other than the lower NIC thresholds and potentially the starting rate for savings income, be maintained until April 2026. 

Our view

The government has not raised the rates of income tax or NICs in line with the Conservative Party’s manifesto pledge. However, freezing the personal allowance and higher rate threshold until tax year 2025/26 is expected to raise incremental taxes of £19 billion over that period. Further savings are anticipated from maintaining the levels of other allowances, including the capital gains tax annual exemption and pensions lifetime allowance.