The 2018 Budget – delivered on a Monday for the first time since 1962 – produced a number of surprises, not least some high-profile ‘giveaways’.
Announcements in the Budget included:
- A £650 increase in the personal allowance to £12,500 for 2019/20, the level originally pencilled in for 2020/21.
- A £3,650 increase in the higher rate threshold to £50,000, again targeted for 2020/21.
- A £25,000 increase in the pension lifetime allowance to £1,055,000 from April 2019.
- A one-third reduction in business rates on smaller retail premises, starting from next April.
- An increase in the annual investment allowance (AIA), from £200,000 to £1,000,000, from January.
However, Mr Hammond’s generosity was not all it appeared. For instance, the personal allowance and higher rate threshold will both be frozen in 2020/21, while the business rates reduction and higher AIA will only last for two years. The Chancellor also kept many tax thresholds and allowances unchanged.
A good example of the impact of frozen thresholds is the personal allowance that will continue to be tapered from an income level of £100,000. This threshold has applied since April 2010, and it creates high marginal rates for some taxpayers. Combined with the increase in the personal allowance, for income between the taper threshold of £100,000 and the starting point for additional rate tax of £150,000:
- the first £25,000 will be taxed at up to 60% (61.5% in Scotland); and
- the next £25,000 will be taxed at 40% (41% in Scotland).
By far the largest element of spending announced in the Budget was for the NHS. Investment is £7.35bn out of a total £15.09bn in 2019/20, rising to £27.61bn out of a total £30.56bn in 2023/24. With such large amounts to secure for the health service, the Chancellor has limited scope to reduce personal tax in the medium term.
If you would like to discuss the impact of the Budget on your finances, please get in touch.
The Financial Conduct Authority does not regulate tax advice.