New tax year new tax allowance
The new tax year will see taxes rise and some allowances will remain frozen. This means investors need to understand where tax pressures will come from, and how to protect themselves, as we inch towards the highest tax burden since the 1950s.
It’s not just the National Insurance (NI) hike and dividend tax rises which will mean parting with more of your money though. We’ve outlined eight tax rises coming into force in April 2022, and five ways to shelter as much of your money from tax as possible.
This article isn’t personal advice. If you’re not sure what’s right for you, ask for financial advice. Pension, ISA, and tax rules can change, and benefits depend on your circumstances. Scottish tax bands and rates of tax are different.
National Insurance is set to rise by 1.25 percentage points from April, which will affect everyone under State Pension age earning more than £823 a month (equivalent to an annual salary of £9,880). This rise was confirmed in the recent spring statement, however, the chancellor also confirmed that the threshold for paying NI will rise from 6 July 2022. This means from that point, you won’t start paying NI until you earn more than £1,047 a month (£12,570 a year).
These changes mean around 70% of workers will pay less NI next tax year than they will this year. However, the tipping point comes at just over £40,000, and someone earning £50,000 will still pay £197 more than they do right now.
The Personal Allowance is how much you can earn before paying tax. And it’s being frozen at £12,570. After this point you start paying different rates of tax depending on certain thresholds – which are also frozen. The point at which you start paying 40% tax, has stuck at £50,270. The additional-rate threshold hasn’t moved from £150,000 since it was introduced in 2010.
Some estimates suggest these freezes will see the number of workers paying the basic rate increase by as much as 5 million to 37 million by 2025/26. And the number of higher-rate taxpayers is predicted to double to 8 million. It’s projected that this could generate as much as an additional £40 billion for the Government.
If you make more than £2,000 per tax year in dividends outside of an ISA or pension, or you own your own business and pay yourself in dividends, you’ll face a tax charge. The chancellor has confirmed this will rise in the new tax year.
Basic-rate taxpayers currently pay 7.5% on any dividends they get over the £2,000 dividend allowance. From April 2022, this will rise to 8.75%.
For higher-rate and additional-rate taxpayers, this will rise to 33.75% and 39.35% respectively. These rises are set to cost investors a whopping £815 million a year by 2025/26.
Higher prices will automatically translate in to paying more VAT. With prices climbing on everything from furniture to fashion, we’ll see the tax on everything rise too.
You can see the impact of rapidly rising prices by looking at what has happened to petrol. For instance, VAT is charged at 20% on petrol, which has typically been around 20p per litre over the past three years. During early March, fuel prices were around 158p per litre. The extra VAT alone has added £3.30 to the cost of filling up a 55-litre tank.
To help ease some of the pressure of rising costs, during the spring statement the chancellor confirmed that from 6pm on 23 March, fuel duty would be cut by 5p per litre. This will be frozen until March 2023.
Council tax is something most UK households must pay. The amount of tax paid varies based on where you live, but for many it’s likely to rise by 2.99% from April. It’s another rise that doesn’t sound like a lot, but in real terms, it can really add up. It could mean the average tax on a house in band D rises £56.94, from £1,898 to almost £1,955 next year.
Now the stamp duty holiday is over, homebuyers face large tax bills again – and those bills are rising.
December 2014 saw the last significant non-temporary change to stamp duty and its thresholds (aside from first-time buyers and property investors). At that time the average property cost was £191,669. However, as the average property price has risen by almost 45% (to £274,712), this means the tax payable has shot up too.
For example, for someone looking to move and buy a new property worth £274,712 now, they’d need to pay £3,735 in stamp duty costs. But, if they purchased a new home on 3 December 2014 at the then average property price, they would’ve only paid £1,333.
For property investors, rising house prices also raise the question of capital gains tax (CGT). House prices rose 10.8% in 2021, which is going to mean higher CGT bills for second property investors who sell up. At the same time, the CGT threshold has been frozen, so if you realise more than £12,300 in capital gains in a single tax year, you’ll pay tax.
The inheritance tax (IHT) nil rate band will remain at £325,000 and the residence nil rate band at £175,000 in the next tax year. Meanwhile, the IHT annual gift allowance is spending its fourth decade at £3,000. Given how house prices are rising, it means more estates will have more inheritance tax to pay. By 2025/26 the government estimates this freeze will raise an extra £445 million a year.
Adding money to a pension offers a tax-efficient way to save for retirement, and an opportunity to cut your tax bill in lots of ways. This includes the potential to lower your income tax liability, and shelter long-term investments from dividend and capital gains tax.
You can normally get a top up from the government in the form of tax relief on contributions into your pension. And the first 25% taken out from a pension from age 55 (rising to 57 in 2028) is usually tax free.
How much tax relief will I get?
If you’re a UK resident under 75, you’ll automatically get 20% basic-rate tax relief added to anything you pay into your personal pension – even if you don’t pay tax.
You can usually pay in as much as you earn up to £40,000 each tax year across all your pensions, and get tax relief. If you earn £3,600 or less (including non-earners) you can still pay in up to £3,600, including tax relief.
If you’re a higher-rate taxpayer, the tax benefits are even more appealing. You can claim back up to a further 20% or 25% in tax relief through your tax return. Scottish taxpayers pay different rates of tax and could claim up to 26% in tax relief.
Pension and tax rules can change, and benefits depend on your circumstances.
You can currently invest £20,000 each tax year into a Stocks and Shares ISA, which allows you to shelter your money from UK income and capital gains tax. If your investments go up in value, you won’t have to pay capital gains tax when you sell them. And if your ISA investments make income, you won’t pay UK income tax on that either. This could be particularly useful if you’re likely to be impacted by the upcoming dividend tax hike. Withdrawals are tax free.
If you’re saving to buy a first property and are aged 18-39 you could consider a Lifetime ISA (LISA). In addition to tax-free growth, you get a 25% bonus on contributions. You can save or invest up to £4,000 each tax year and the government will give you a bonus of up to £1,000. You can withdraw your money to buy your first home from 12 months or wait until you’re 60 and take your money out then. Other withdrawals will usually mean there’s a 25% government withdrawal charge.
Don’t forget Junior ISAs (JISAs) too. In the current tax year, you can save or invest up to £9,000 in a JISA for any qualifying child, and all interest, dividends and capital gains are free of UK tax. They can access this at the age of 18, or roll it over into an adult ISA.
Investments can fall as well as rise in value, so you could get back less than you invest.
In some cases, the government will let you give up a portion of your salary and spend it on certain things free of tax (and in some cases National Insurance). This includes pensions, bike-to-work schemes, and technology schemes. This won’t boost your take-home pay, but it will cut your tax bill. It’s worth speaking to your employer about any salary sacrifice schemes they might offer.
Assets that produce an income can usually be passed between spouses or civil partners without triggering a tax bill. This can help you to manage your tax bill if one of you is nearing an allowance limit.
If one spouse is a non-taxpayer, and the other is a basic-rate taxpayer, the marriage allowance lets the non-taxpayer give £1,260 of their personal allowance to their spouse in the current tax year.
To put this into context, let’s say you’re a non-taxpayer earning £10,000 and your spouse is a basic-rate taxpayer earning £40,000. Their taxable income would be £27,430 (as the first £12,570 is tax free).
As the non-taxpayer, if you claim marriage allowance, you could transfer £1,260 of your personal allowance to your spouse. Your personal allowance becomes £11,310 and your spouse gets a ‘tax credit’ on £1,260 of their taxable income.
Knowing what to do with your money can be confusing at the best of times. A quick conversation with one of our qualified Independent Financial Advisers can help point you in the right direction.
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