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What does the 2021 budget mean for my financial planning?

You've probably seen pictures of Rishi Sunak holding that famous red briefcase outside number 11. We take you through the Chancellor's 2021 spring budget. With all those fine-detail changes it can be hard to see what the budget means for you. Our straight-talking guide will help you understand what might affect your personal finances throughout 2021 and into the future.

What is the UK budget?

Every year the Chancellor of the Exchequer, who is head of Her Majesty’s (HM) Treasury, presents the Government’s annual budget. It details everything HM Revenue and Customs intends to collect and the amount that will be spent by the public sector.

There is a huge amount of detail around taxes, grants, loans, debt, fiscal policy and the overall direction the Government will take in the coming years. You can access the full 2021 budget documents from Gov.UK here.

This year nearly all the headlines have been grabbed by the Covid pandemic recovery measures, and the financial implications it’s had on us as individuals, on businesses and on how the country is run.

The key points of the UK 2021 budget

  • The damage to the UK economy has been deep, with 700,000 lost jobs and a 10% downsizing of the economy. The largest fall in 300 years.
  • The UKs borrowing is at its highest outside of wartime.
  • The furlough scheme will be extended until the end of September 2021. Employers will be asked to contribute more in July (an additional 10%) and August (20% more) until the scheme is phased out.
  • Self-employment income support is also continued until the end of April, with a fourth grant to cover 80% of average trading profits.
  • Five billion pounds has been set aside for the restart grant for businesses to help them get back on their feet.
  • A new loan scheme will replace the bounce back loan (BBL) and coronavirus business interruption loan scheme (CBILS). Loans will be offered between £25,000 and £10,000,000.
  • No business rates for the Hospitality and Leisure sector for three months, then a ⅔ discount for the next nine months of the year. Gyms and other non-essential retail premises will also get a further three months business rates holiday.
  • The 5% VAT reduction for the hospitality, hotel and holiday accommodation sector will hold until the end of September, with a gradual increase back to the standard rate by April 2022.
  • The current stamp duty holiday will stay, for properties up to £500,000. In June it will drop to £250,000, before returning to the usual level of £125,000 in October.
  • First-time buyers were given a helping hand with a government-backed mortgage guarantee for 95% mortgages.
  • No raise in the rates of national insurance, income tax or VAT, and a freeze on personal tax thresholds.
  • The personal allowance will rise to £12,570 from £12,500 for the 2021/22 tax year and the basic-rate band will increase to £37,700 from £37,500. The personal allowance and the basic-rate band will then be frozen until April 2026.
  • Inheritance tax, pensions lifetime allowance, annual exempt allowance from capital gains and VAT exemption thresholds are all frozen.
  • From April 2023, the corporation tax rate will go up to 25%. A tapered rate means companies with less than £50,000 in profits will stay at 19%.
  • A new super-deduction on capital allowance tax for investments by companies of 130%
  • Duties on alcohol and fuel frozen, with planned hikes scrapped.

How does this budget affect you?

Away from the headlines, this budget was about recovery. This year the focus will be on supporting people and their personal finances as the pandemic, we hope, is brought under control. By freezing personal tax thresholds, the Chancellor has used a tactic called “fiscal drag”. While he didn’t actually increase these rates, millions of people will progressively move into higher brackets of income and inheritance tax in the future thus creating more tax revenue. Businesses will be asked to bear some burden as recovery begins with increased taxation on profits.

As we near the start of a new tax year you can find out about the key dates and changes to tax in our ultimate guide to the 2021/22 tax year.

How does the budget affect my personal finances?

For those without work: Those who are unemployed see a small rise of 0.5%, to £74.70 per week, in their job seekers allowance. Those on furlough see continued support.

Families: Those with kids see small rises in their child benefits and tax credits. Small changes in the tax rates, national insurance and personal allowance mean pretty insignificant changes to the budgets of most families. Notable exceptions are two unemployed parents with two kids, who are as much as £451.36 a year worse off. Also, single-income couples, one disabled, with two children, see as much as a £635 rise in their income. Families with two kids, where the couple are married, see a bigger rise of around £639, thanks in the most part to a £500 one-off payment if you receive working tax credits.

Couples: The way the chancellor approached this budget means a barely noticeable change to the finances of most couples.

Pensioners: The state pension credit this year means an additional £265.20. The uprating of pensions may see some enjoy a small increase in their retirement finances.

If you’re employed: Furlough notwithstanding, it was a quiet budget for those who are employed. That “fiscal drag’ we mentioned is a “carry on as you were” statement from the chancellor.

For savers: The ISA tax rates, children’s savings included, remained the same. The charge on unauthorised withdrawals from Lifetime ISAs was reduced to 20% when the pandemic began, but will be returning to 25% as of 6 April 2021.

There was a coded warning that “Interest rates won’t stay low forever”, but there was no signal of an immediate change from the Bank of England.

For those who want to “save green”, the new ‘green’ NS&I savings bond may be a way to do just that.

If you’re looking for investment advice, read our comprehensive guide to savings and investment planning or contact one of our investment specialists today.

Businesses and business owners

One area where the chancellor went further than expected was the rise to 25% in corporation tax for businesses making profits of over £250,000. This will potentially have a knock-on effect on the amount that businesses pay in dividends and bonuses. However, that tapered rate will keep the burden lower for businesses that generate less profit.

Better news is the availability of new grants and loans for businesses as they try to get back to normality. Aside from the continued furlough support, those loans of £25,000 to £10,000,000 may well help cushion the transition to a fully open economy and mitigate the risk to smaller businesses as they ‘return to normal’.

The restart grants of £6,000 per premises, and £18,000 for worst-affected businesses, is cause for guarded optimism by those businesses that qualify.

The retained cuts in VAT and business rates will also be a help to many planning their business finances for the next fiscal year.

Further support can be found with the newly unveiled “help to grow” scheme that sees businesses offered practical help with the managerial and digital elements of their operations. You can register for that from today.

Perhaps the biggest news, for bigger businesses at least, is that 130% super-deduction. This allows businesses who make qualifying investments to see as much as 25p in the pound wiped off their tax bill.

What the budget means for the young people in our lives

The pandemic has hit the chances of young people hard. Education, job prospects, social life, home buying and travel have all been severely dented. That’s especially hard if you’re just trying to get going as a young adult. Help is at hand with a strong mention of additional funds for companies willing to take on an apprentice and an increase to £8.91 for the national living wage.

If buying a home is on your agenda then that Government-backed 95% mortgage deal may very well help you realise that dream. Some had hoped that the Government would force a change where rental payment history would be taken into account for mortgage applications, but there was no mention of that in this year’s budget. If you’re looking for more information on how to start managing your finances well, read our guide on how to manage your money in your 20s and 30s or contact one of our financial advisers today.

Wider economic incentives

There was a strong theme of encouragement for the green energy and banking sectors, with a planned ‘Green Bank’ in Leeds with a £12 billion investment book. This is a signal, along with mentions of carbon offset investments in the city, that the chancellor wants to see the financial and environmental sectors join forces to a degree.

The arts and community were helped along with a £400 million fund for the arts, along with £90 million for museums. There is a £150 million pot for communities to buy local pubs, sports clubs and theatres, which could open the door for local opportunities.

Lastly, the eight “free ports’ that were announced will all be a focus for investment, from a business, financial, and property perspective. They are also likely to see tax breaks and grants to make them an attractive proposition.

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