While there was little in the way of immediate changes in the latest UK Budget, the freezing of some allowances is set to increase tax bills in the long run.
This year’s UK Budget predictably focused on ongoing pandemic support, bringing very few changes to personal taxes. Chancellor Rishi Sunak did, however, introduce some longer-term measures to collect more tax by freezing the main allowances and exemptions for the next five years. According to the Office for Budget Responsibility, the overall impact of these measures will be that the UK’s tax burden will rise to its highest level since the 1960s!
So what changes may affect UK nationals living abroad, and what can you do to minimise any negative impact?
Income taxes
UK taxpayers (including non-UK residents) see a slight increase to the personal income tax allowance thresholds at each end: £12,570 at the 20% tax band and £50,270 at the 40% rate. However, these will be frozen until at least April 2026. This is estimated to bring 1.3 million more people into income tax liability, with one million more paying the higher tax rate, altogether netting an extra £8 billion in the 2025/6 tax year.
The band of UK savings income that can be earned tax-free stays at £5,000 and the annual ISA subscription limit at £20,000 (£9,000 for a Junior ISA). The dividend allowance remains at £2,000.
Remember: investments like ISAs may become taxable in Portugal once you are non-UK resident. Take time to explore alternative arrangements that may be more tax efficient and better suit your circumstances, goals and risk appetite.
Capital gains tax (CGT)
As with income tax, the annual allowance will be frozen for the next five years, but the allowance does not increase, staying at £12,300 for individuals (£6,150 for most trusts).
Despite expectations that CGT rates would be aligned with income tax rates, there is no change here, so rates remain between 10% and 28%.
Don’t forget that, in recent years, non-UK residents became liable for capital gains tax on most UK property and land.
Pensions
Annual allowance: This remains at £40,000 – as it has been since 2016 – and starts reducing once ‘adjusted income’ reaches £240,000.
Lifetime allowance (LTA) – This won’t increase with inflation as planned, so stays fixed at £1,073,100 until at least 2026.
If your combined UK pension benefits are near this threshold, consider the potential impact of future growth. Once investment markets recover to pre-pandemic levels, this could bring many more pension funds within the scope of the LTA’s 25% or 55% penalties. The Treasury expects to collect an extra £250 million this way.
QROPS – There were no changes to Qualifying Recognised Overseas Pension Schemes, with transfers to EU/EEA-based QROPS still tax-free for EU residents. The 25% ‘overseas transfer charge’ continues to only apply to transfers outside the EU/EEA. But now the UK has left the bloc, this could potentially be extended to capture EU transfers in future.
Once in a QROPS, UK pension funds become immune to LTA penalties and future changes to UK pension rules while unlocking other benefits, so carefully consider your options here.
Inheritance tax
Despite much anticipation that this year could see inheritance tax changes, again the only action was freezing the exemptions and allowances for the next five years.
The tax-free ‘nil rate band’ allowance stays at £325,000 per person (unchanged since 2009!) The residential nil rate band (RNRB) – which provides extra tax relief when passing on a main home (including overseas) to direct descendants – remains at £175,000 per person.
The Treasury collected £5.2 billion in inheritance taxes in the 2019/20 tax year. With these latest freezes, they expect to generate an additional £15 million next year, increasing to £445 million by 2026.
What can you do to minimise the impact?
Although this new tax year brings relatively few changes, there are longer term implications. The Chancellor’s strategy of freezing allowances, exemptions and reliefs is designed to raise more tax revenue as people’s income, capital gains, and asset values grow. Taxpayers may also feel the pinch as the cost of living increases over time.
Wherever possible, you should make full use of the available allowances each year to help minimise your tax bill. However, no one action in isolation will make a substantial difference. You need to make sure your overall financial arrangements are structured as tax efficiently as possible for your life in Portugal to help minimise exposure for you and your heirs.
This is a good prompt to think ahead and review your tax planning to check you are making the most of all the available tax-efficient opportunities, in the UK and your country of residence. For the best results, take personalised advice from a cross-border specialist with understanding of both the UK and Portuguese tax regimes.
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.
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