Calculations from Quilter, the financial adviser and investment platform, reveal that government tax breaks for savings and investments have become less generous in the past decade, decreasing by an average of 6%.
Quilter has analysed eight main UK tax allowances, of which six have either frozen or decreased, including vastly less generous pension allowances and frozen inheritance tax thresholds.
The pensions annual allowance, the limit on how much money you can build up tax-free in your pension in any one tax year while still benefiting from tax relief, has shrunk by 20%, while the equivalent lifetime allowance has dropped by 28%. Pension savers have also been hampered by a 60% reduction in the money purchase annual allowance.
The nil rate band for inheritance tax – the threshold above which inheritance tax is payable – has remained frozen since 2009. Conversely, house prices have rocketed by 9.6% in just one year to January 2022, reaching an average of £274,000. Office of Budget Responsibility projections reveal this ‘fiscal drag’ effect, which is pulling more owners of modest homes into the IHT net, will eventually boost government coffers by £8.3bn by 2026/27, a 63% increase in inheritance tax revenues from 2019/20.
| IHT Outturn (bn) | IHT Forecast (£bn) | ||||||
| 2019/20 | 2020/21 | 2021/22 | 2022/23 | 2023/24 | 2024/25 | 2025/26 | 2026/27 |
| 5.1 | 5.4 | 6.1 | 6.7 | 6.9 | 7.3 | 7.8 | 8.3 |
Source: Office of Budget Responsibility, March 2022
Meanwhile, the annual inheritance tax gifting exemption has not altered in years, remaining at £3,000 since 1981, which if indexed would be £12,253 today. If indexed the nil rate band would stand at £464,512 today and instead remains frozen at £325,000 until 2026.
| Tax allowance/threshold | Level in 2012/13 tax year | Level in 2022/23 tax year | Percentage increase/decrease |
| Personal allowance | £7,475 | £12,570 | +68% |
| Dividend allowance | £5,0001 | £2,000 | -60% |
| Lifetime allowance | £1,500,000 | £1,073,100 | -28% |
| Annual Allowance | £50,000 | £40,000 | -20% |
| Money Purchase Annual Allowance | £10,0002 | £4,000 | -60% |
| Individual Capital Gains Tax threshold | £8,105 | £12,300 | +52% |
| Inheritance tax nil rate band threshold | £325,000 | £325,000 | +/-0% |
| Inheritance tax annual exemption | £3,000 | £3,000 | +/-0% |
| Average | -6% |
- Dividend allowance was introduced in the 2016/17 tax year
- Money Purchase Annual Allowance was introduced in the 2015/16 tax year
Shaun Moore, tax and financial planning expert at Quilter:
“The various tax allowances and thresholds are great ways to incentivise people to save for their future and distribute their wealth. However, many of these have taken huge hits over the past decade and face a big freeze in the years to come.
