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The UK has recently entered its highest tax burden in 70 years, following the Chancellor’s 2021 Autumn Budget. This comes at a time when energy is in shorter supply during the colder, winter months and inflation is also on the rise (increasing the overall cost of living).
As such, many are asking what they can do to balance and protect their finances as we enter 2022. In this article, our team at Cedar House offers some ideas for making your wealth and income more efficient from a tax and budgeting perspective.
We hope you find this content useful. If you want to discuss your own financial plan with us, please contact our team for more information or to access personalised financial advice:
020 8366 4400 or enquiries@cedarhfs.co.uk
A summary of tax changes
In 2021-22, the looming challenge to the UK economy is, of course, COVID-19 and recovering from the damage to the public finances. To address this (and other issues such as the cost of social care), the UK Government has announced a range of tax “freezes” and rises to increase the money coming into its coffers. Here is a quick summary of some of key changes, many of which were announced in the Autumn 2021 Budget:
- The State Pension “triple lock” has been suspended, to avoid a huge 8% increase from next April (due to unexpected wage growth). This means that State Pension recipients should see a more modest rise in income – perhaps 2-4%.
- From April 2022, the tax-free personal allowance will be frozen at £12,570 until 2025/26 so that more people end up paying tax (due to projected wage growth). The Higher Rate threshold will also be frozen at £50,270, meaning that more people will likely end up paying 40% tax instead of only the 20% Basic Rate.
- A 1.25% increase to dividend tax and National Insurance will be introduced from April 2021-22 (the health and social care levy). The latter will be due from both employees and employers. This, naturally, will result in lower take-home pay for many people – but, hopefully, fewer people paying crippling care costs in old age due to the new social cap, set at £85,000.
Tax-efficient planning
Whilst it is important to play our fair role in funding our society’s public services (e.g. the NHS), it benefits only the government to not plan taxes properly. Arranging your affairs optimally can put more money back into your pocket and help grow your wealth in the long term. Here, there is a range of tax planning ideas to consider with your financial adviser – which may help:
- Make sure any pay rises do not put you, inadvertently, into the Higher Rate tax bracket. If you do not need the extra money right now, you could divert any increases into your workplace pension – where it receives tax relief.
- Make sure your investments are getting the most out of your ISA and allowances. Bear in mind that, each tax year, you can earn up to £2,000 in dividends without these getting taxed. Moreover, any dividends, capital gains and interest earned within an ISA will also be free from tax. One way to minimise your exposure to the 1.25% dividend tax rise, as such, may be to move some assets around (with help from your adviser). Remember that when the tax year ends (in April) any unused allowance is lost.
- Business owners should carefully examine the balance between the salary and dividend they take from their company. Even with the dividend tax rise in April 2022, it is still likely that owners will face a lower tax bill when taking a lower salary (e.g. under their personal allowance) whilst taking a larger dividend. However, bear in mind that a lower salary can affect other aspects of your financial plan. In particular, it can reduce the amount lenders are willing to offer you, for a mortgage.
Other considerations
It is not just higher taxes that can destabilise household finances and wealth growth. Higher cost of living can result in your monthly income not stretching as far. This, in turn, can lead to greater pressure on your budget and dipping into your overdraft (or credit cards) to fund your lifestyle, if you are not careful.
With inflation on the rise in the UK (possibly reaching 4% in 2022), it is now especially important to make sure there is a healthy gap between your income and expenses. Ofgem, for instance, has hinted that energy prices could rise 30% more in 2022. There is also the possibility of higher interest rates – which would result in dearer monthly mortgage payments for many people.
One idea to address the latter possibility is to consider remortgaging for a better rate (e.g. if your home equity has grown since last taking out a deal). Another important step is to make sure that any financial protection is fully up-to-date and meets your needs – e.g. income protection, life insurance and/or critical illness cover. Here, a financial adviser can help you.
Conclusion
Interested in discussing your financial plan with an experienced financial adviser? Get in touch today to discuss your financial plan with a member of our team here at Cedar House via a free, no-commitment consultation:
020 8366 4400 or enquiries@cedarhfs.co.uk