Hidden in the spending review was a statement that some income tax allowances and thresholds and national insurance limits would increase in line with the September CPI figure. ICAEW’s Tax Faculty explains what this means.
When the government isn’t making bold statements about raising income tax thresholds, the default position is that allowances are uprated in line with September’s consumer price index (CPI). The annual CPI increase to September 2020 was 0.5%.
When increasing the income tax personal allowance, the increase is rounded up to the next £10 (see s57, Income Tax Act 2007). This means that the personal allowance for 2021/22 should be £12,570 (up from £12,500 in 2020/21).
The figure of £12,570 has been confirmed in The Income Tax (Indexation) Order 2021, SI 2021/111.
The basic rate limit is always a multiple of £100, and when the limit is increased, the legislation allows for the limit to be rounded up to the next £100 (see s21, Income Tax Act 2007). This means that the basic rate limit for 2021/22 should be £37,700 (up from £37,500 in 2020/21).
The figure of £37,700 has been confirmed in The Income Tax (Indexation) Order 2021, SI 2021/111.
The Spending Review also confirmed that the government will also use the September CPI figure as the basis for setting all national insurance limits and thresholds, and the rates of class 2 and 3 national insurance contributions for 2021/22.
ICAEW’s Tax Faculty reported on the class 1 thresholds when details emerged in December 2020.
A statutory instrument was passed on 15 February 2021 confirming that the class 2 rate remains unchanged at £3.05 a week, but that the small profits threshold will increase from £6,475 in 2020/21 to £6,515 in 2021/22. The class 3 rate increases from £15.30 a week to £15.40 a week.
This guidance is created by the Tax Faculty, recognised internationally as a leading authority and source of expertise on taxation. The Faculty is the voice of tax for ICAEW, responsible for all submissions to the tax authorities. Join the Faculty for expert guidance and support enabling you to provide the best advice on tax to your clients or business.
- 22 Feb 2021 (12: 00 AM GMT)
- The national insurance section has been updated to reflect the passing into law of SI 2021/157 on 15 February.
- 05 Feb 2021 (12: 00 AM GMT)
- Updated to include rates in published legislation.