How new tax year could affect your personal finances

ADVERTISEMENT

With April upon us, a new financial year has started. There are important changes happening that you need to be aware of to best manage your finances in 2022. These changes will affect everyone from working-age all the way to retirement, irrespective of income level or net savings. In this article, we will outline the most impactful changes to be aware of and share some tips on how to be best prepared.

National Insurance contributions have increased by 1.25%

National Insurance contributions have risen by 1.25% for employees and the self-employed. The increased contributions are set to fund social care with initial funds dedicated to helping the NHS bring down waiting times.

Instead of paying 12% on income up to £50,270 and 2% on anything in excess, employees will now pay 13.25% and 3.25%, respectively. For the self-employed, rates will rise from 9% and 2% to 10.25% and 3.25%, respectively.

The national insurance threshold will increase to £12,570 in line with income tax personal allowance in July, but for now, it sits at £9,880.

Salary sacrifice is a way to negate this impact. When you pay for products via salary sacrifice, you pay from gross pay, meaning no income tax or national insurance is paid. Examples could include pensions, electric vehicle payments, buying bicycles, childcare vouchers and gym memberships.

Dividend Tax Hit

Dividend tax is also being hiked by 1.25%, seeing rates rise to 8.75% for the basic rate payers, 33.74% for those paying up to £50,270, and 39.35% for those earning above £150,000.

The dividend tax allowance remains unchanged at £2,000. Prior to being reduced in 2018, the dividend allowance once stood at £5,000. It’s worth noting that if your income comes only from investments or company dividends, you are able to use your tax-free personal allowance meaning £14,570 can be earned before facing any tax liability.

This tax hike will mostly impact those who own shares outside of an ISA or pension. The government estimates that 40% of people who have dividend income outside of an ISA will face tax increases, and 70% of this will be paid by higher income tax earners.

Income tax and capital gains tax threshold remains frozen

Income tax personal allowance and higher rate thresholds remain frozen for the next four years. Historically this has increased in line with inflation. Due to inflationary pressure on wages, most will see a proportion of their earnings subject to income tax.

Many individuals will find they become higher rate taxpayers despite earnings not increasing in line with inflation. An increase in the national average wages of 4.8% will see those who earned £48,000 last year pay the higher rate on the part of their income. This means the purchasing power of your disposable income is likely to decline.

Capital gains tax personal allowance also remains frozen at £12,300. The rate paid also remains unchanged at 10% for lower-income earners and 20% for those earning a higher income.

Controversial Rise In pension by 3.1%

Under the triple lock, state pensions increased by whatever was the higher, with inflation and earnings growth for 3 years. The government, however voted to move to a ‘double lock’ system this year.

When the double lock was set, The House of Commons also decided to increase pensions by inflation as opposed to the higher wage growth figure. Controversially, inflation was markedly lower than the 6.2% figure in the Consumer Price Index (CPI) now reflects. Pensions were set at 3.1%, which is almost half of the current inflation levels.

Author Bio: Daniel Tannenbaum

Daniel is a London-based financial consultant who has worked in fintech for over 10 years.