Hollands adds: “To find out how fiscal drag might, or might not, have been affecting workers and savers over the last decade we compared some of the major thresholds and allowances from ten years ago to where they are now. And then also to where they would have been if they had risen in line with consumer prices index inflation.
| 2012/13 | 2021/22 | |||
| Actual | Actual | Adjusted | Difference | |
| Income Tax | ||||
| Personal allowance | £8,105 | £12,570 | £9,758 | £2,812 |
| Higher rate threshold | £34,371 | £50,271 | £41,383 | £8,888 |
| Withdrawal of personal allowance | £100,000 | £100,000 | £120,400 | -£20,400 |
| Additional rate threshold | £150,000 | £150,000 | £180,600 | -£30,600 |
| Child benefit income tax charge | £50,000 | £50,000 | £60,200 | -£10,200 |
| Pensions | ||||
| Pension annual allowance | £50,000 | £40,000 | £60,200 | -£20,200 |
| Lifetime allowance | £1,500,000 | £1,073,100 | £1,806,000 | -£732,900 |
| Basic amount’ | £3,600 | £3,600 | £4,334 | -£734 |
| Savings | ||||
| Individual Savings Account | £11,280 | £20,000 | £13,581 | £6,419 |
| Junior ISA | £3,600 | £9,000 | £4,334 | £4,666 |
| Personal savings allowance | n/a | £1,000/£500 | n/a | £1000/£500 |
| Investing | ||||
| CGT exemption | £10,600 | £12,300 | £12,762 | -£462 |
| Dividend Allowance | n/a | £2,000 | n/a | £2,000 |
| Venture Capital Trusts | £200,000 | £200,000 | £240,800 | -£40,800 |
| Inheritance | ||||
| IHT nil rate band | £325,000 | £325,000 | £391,300 | -£66,300 |
| Other | ||||
| VAT registration threshold | £77,000 | £85,000 | £92,708 | -£7,708 |
| Stamp Duty Land Tax threshold | £125,000 | £125,000 | £150,500 | -£25,500 |
Headline Consumer Prices Index growth for the period April 2012 to February 2022 was 20.4%.
“It threw up some interesting results. Those earning an income have mostly done OK, with the personal tax-free allowance and higher rate threshold being raised by successive Tory Governments. Although many of the highest earners will have been dragged into higher marginal tax rates – with a precipitous increase in tax liability at the £100,000 mark where the personal allowance starts to be chipped away at.
“Many savers have been blessed with much higher annual limits on how much can be put into Individual Savings Accounts. Then, in the dividend allowance and the personal savings allowance, there are two exemptions that did not exist ten years ago.
“In contrast, pension savers have seen the amounts that they can contribute into schemes while still benefiting from tax relief come down quite substantially. The Lifetime Allowance has been reduced massively in both nominal and real terms, and while £1,073,100 might sound like a lot of money there are plenty of people out there who are being drawn in by this limit.
“That is not just members of generous defined benefit schemes like teachers, doctors and civil servants, but also – and this will only snowball in the coming decades – workers who have saved from an early stage in their careers into a defined contribution scheme. People retiring at 55, 60 or even 65, have several decades of retirement to fund and often a mortgage to pay off, and in that context the disincentive to accumulating more pension funds above the LTA can start to have an adverse impact on retirement living standards.
“Meanwhile the freeze to the inheritance tax zero rate threshold against a backdrop of rising asset prices is bringing more and more families into this tax net. The zero rate threshold has been stuck at £325k since April 2009 and so by 2026 it will have remained frozen for 16 years, with no certainty of it being adjusted even then. The Treasury’s Inheritance tax receipts in 2012/13 were just over £3 billion, while for 2020/21 they totalled £5.4 billion.
“This makes it all the more essential that better off households adopt a tax-efficient strategy to transfer their wealth to the next generation.”
