As inflation continues to rise, the cost of living crisis is leaving millions of Brits struggling financially.
Adding to the strain of rising living costs are a raft of tax rises and threshold freezes that could further squeeze your household budget this year.
Managing allowances and making sure your money works as tax-efficiently as possible is key.
Keep reading for a closer look at some of the tax changes that could affect you this year, plus a few ways that you might mitigate their impact.
1. National Insurance contributions increased in April 2022
Back in September, the prime minister announced a 1.25 percentage point rise in National Insurance contributions (NICs). Payable by employers and employees, it is expected to raise around £12 billion a year for the Treasury.
The NIC increase will become the “Health and Social Care Levy” from April 2023, at which point, anyone who is working beyond State Pension Age will pay NICs (at 1.25%) for the first time.
While the increase could affect you over the next couple of months, Rishi Sunak used his spring statement to confirm a rise in NIC thresholds from 6 July 2022, leading to an overall NIC cut for many.
The combination of rising contributions and an increased threshold (to £12,750 a year), means that 70% of workers will see their NICs fall.
If you earn over £40,000 a year, however, you are likely to pay more.
Consider salary sacrifice
You can use salary sacrifice to reduce your take-home pay and decrease the amount of National Insurance you are liable for.
Check to see if your employer offers this option. If they do, it could reduce their NICs too.
Salary sacrifice can reduce the tax you pay while increasing the overall size of your pension pot. You’ll still receive tax relief on your contributions too. This makes pension salary sacrifice arrangements highly tax-efficient.
You’ll need to think carefully about the ramifications of reducing your salary. It might affect other workplace plans you hold and affect your eligibility for means-tested benefits. You might also find it harder to get a mortgage as lenders will often use your salary to assess affordability.
2. Many thresholds remain frozen
The Personal Allowance didn’t change on 6 April 2022. It has been frozen at its current rate of £12,570.
The higher and additional rates have both been frozen too, at £50,271 and £150,000 respectively. The latter threshold hasn’t changed since it was introduced more than a decade ago.
As wages rise, the number of people tipping over into a higher bracket is set to increase too.
Inheritance Tax (IHT) bands
The IHT nil-rate and residence nil-rate bands remain frozen until at least 2026. They currently stand at £325,000 and £175,000, respectively.
As the value of the property and investments you hold increases over the coming years, you could find your estate becomes liable for an increasing amount of IHT. The government expects the freeze to raise an extra £445 million a year by 2025/26.
Tax-efficient estate planning is crucial… And don’t forget your pension
If you’re already retired, you’ll need to carefully manage the pension withdrawals you take. This means weighing them against your employment income too, if you are still working.
Your salary, and the pension withdrawals you make, are taxed as income. Be careful, especially when drawing down large sums, that you don’t tip yourself into a higher Income Tax bracket.
There are many ways to manage your estate planning and we can help you decide on the right options for you. You might consider lowering the value of your estate by giving a living inheritance. Remember, too, that unused pension funds can be passed on to a chosen beneficiary, tax-free in some cases.
Read our recent blog, How could Inheritance Tax affect you and your family? for more information.
3. Other taxes, and the cost of living, is set to rise
If you pay yourself dividends of more than £2,000, you will be liable for dividend tax.
This rose in April 2022. Basic-rate taxpayers will now pay 8.75% tax on any dividend amount above the £2,000 allowance (up from 7.5%).
As a higher-rate taxpayer, you’ll pay at a rate of 33.75%, increasing to 39.35% for those on the additional rate.
Council Tax also rose in April, by an average of 3.5%. The average band D household will see their bill rise by £67, to just shy of £2,000.
The cost of living continues to rise, with the Office for National Statistics confirming inflation rose to 9% in April. The rising cost of the goods you buy will continue to be a factor this year, with inflation not expected to return to its 2% target until 2024.
Keep an emergency fund in cash but consider investment too
With living costs rising and tax increases kicking in, keeping rainy day cash in an easily accessible account could really help if the unexpected strikes.
Remember, though, that high inflation diminishes the real-terms value of cash holdings.
If you have long-term financial goals, like retirement, you might consider paying your future self first by investing in pensions or an ISA.
Both are incredibly tax-efficient and offer the potential for inflation-beating returns, with added risk. Think about your risk profile and speak to us if you think increasing your investments might be a good option for you.
Get in touch
Rising taxes, a soaring cost of living, and frozen allowances mean that making your money work hard for you isn’t easy.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.
Workplace pensions are regulated by The Pension Regulator.