In this blog, we outline the key personal tax changes that you need to know about for the tax year 2021/22. Look out for our next blogs detailing the changes to other types of tax this tax year.
Income Tax Allowances, Rates & Thresholds
The Personal Allowance has been frozen for five years, remaining at £12,570 until April 2026. (Apart from those whose adjusted net income exceeds £125,140, who are not eligible for the personal allowance).
The Married Couple’s Allowance has been increased to £9,125 for 2021/22. To be eligible for this allowance, one spouse or civil partner must have been born before 6th April 1935. (The allowance is reduced by £1 for every £2 by which income exceeds £30,400 until the minimum amount of the allowance, set at £3,530 for 2021/22, is reached.)
The Blind Person’s Allowance is increased to £2,520 for 2021/22.
Income Tax Rates are unchanged this year and will remain frozen until April 2026. The basic rate of income tax will remain at 20% for the 2021/22 tax year, the higher rate will remain at 40% and the additional rate at 45%.
The Basic Rate Band will remain at £37,700 until April 2026. As the personal allowance is also frozen until April 2026, the point at which higher rate tax becomes payable by someone in receipt of the personal allowance will remain at £50,270 for this period. Likewise, the point at which the additional rate of tax becomes payable will remain at £150,000.
Dividend Tax Rates and Allowance
The Dividend Rates of tax are unchanged for 2021/22. Dividend income, taxed as the top slice of income, is taxed at 7.5% to the extent that it falls within the basic rate band, at 32.5% to the extent that it falls within the higher rate band and at 38.1% to the extent that it falls in the additional rate band.
The Dividend Allowance remains at £2,000 for 2021/22.
Savings Allowances
The band of income that is subject to the Savings Starting Rate of 0% remains at £5,000 for 2021/21. The starting rate is only available where taxable non-savings income is not more than £5,000. Where taxable non-savings income is less than £5,000, the starting rate band is reduced by the amount of the taxable non-savings income.
The Tax Free ISA Subscription Limit remains unchanged at £20,000 for 2021/22. Likewise, the subscription limit for Junior ISAs remains at £9,000 and the subscription limit for Lifetime ISAs remains at £4,000.
Pension Allowances
The Pension Annual Allowance remains at £40,000 for 2021/22.
For individuals with adjusted income of more than £240,000 and threshold income of at least £200,000 the annual allowance is reduced by £1 for every £2 by which adjusted income exceeds £240,000 until the minimum amount of the allowance is reached. For 2021/22 this is set at £4,000.
A reduced allowance, the Money Purchase Annual Allowance, applies where an individual has flexibly accessed their pension having reached age 55. This remains at £4,000 for 2021/22.
Freezing the personal allowance and the income tax thresholds is a tax raising measure to raise revenue to contribute to the cost of the Covid-19 pandemic. As incomes rise, people who previously did not pay tax are brought within the tax net once their income exceeds the personal allowance. Likewise, basic and higher rate taxpayers move into the higher and additional rate bands as their income increases.
