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The UK now has its highest tax burden in 70 years. With inflation also now at 9%, putting further financial pressure on households, many are looking to understand their entitlements and how to get the best from them in 2022. Below, our financial planners at Cedar House outline the main UK taxes that affect you, how they have changed and how to optimise your allowances so you can put more money back in your pocket.
We hope this is helpful to you. 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
Income tax
The main income tax bands in England and Wales have not changed since 2007 (when Gordon Brown lowered the Basic Rate by 2%, to 20%) and 2009, when a 45% tax was introduced to help the UK recover from the Great Recession. Since then, the tax-free Personal Allowance changed slightly in different tax years. In 2019-20, for instance, you could earn up to £12,500 before you faced income tax. Now, it stands a bit higher at £12,570.
Since income tax doubles at the Higher Rate (up to 40% from the 20% Basic Rate), those earning over £50,000 can lower their exposure by making pension contributions, which receive tax relief. For example, someone earning £60,000 per year could put £10,000 into her pension and get a 40% “boost” to their contribution (£4,000) whilst eliminating any 40% tax on their income.
Another idea is to consider salary sacrifice. Here, you can ask your employer to raise their own pension contributions instead of giving you a pay rise (which may take you into the Higher Rate). This can be more tax-efficient for both parties. However, take care that you do not undermine your other financial goals (e.g. a lower salary means less to borrow for a mortgage).
National Insurance
National Insurance (NI) recently changed in April 2022 to help fund the NHS. Now, employees and self-employed people pay 1.25p more in the pound for NI. The former pay directly out of their wages via PAYE, whilst the latter pay out of their profits. Employers must also pay too.
The Government says that NI will return back to its old rate in April 2023. Assuming this pledge is honoured, most individuals do not need to make dramatic changes to their financial plan to reduce NI. However, speak to your financial planner to make sure you are not overpaying (e.g. those who are paying the wrong class of NI due to working two jobs).
Taxes on investments
Two main taxes exist on investments. Capital gains tax (CGT) is levied on profits you make from selling certain assets, such as company shares. Dividend tax is applied to income from shares. Here, some recent changes are important to note.
In April 2022, a new “health and social care levy” was introduced, applying a 1.25% extra tax on dividends to help fund a new £86,000 cap on an individual’s potential social care costs. Since 2016, the taxes on dividends have been:
- 7.5% for those on the Basic Rate.
- 32.5% for someone on the Higher Rate.
- 38.1% for the Additional Rate.
Now, these are 8.25%, 33.75% and 39.35%, respectively. However, taxpayers can still earn up to £2,000 from dividends each tax year, outside of an ISA, without the income facing tax.
Naturally, investors should take as much advantage of this as they can. Consider whether your ISA could house some of your dividend investments, too. You can put up to £20,000 into an ISA each tax year, and any dividend (and capital gains) will be tax-free.
Those looking to dispose of assets profitably should also speak to a financial planner about how to structure their wealth tax-efficiently (using your £12,300 annual CGT-free allowance). As an example, a Buy To Let property cannot be held in an ISA. So, you may wish to sell your property within one tax year to protect your profits, and then sell any non-ISA shares in the next year.
Another idea is to consider tax-efficient investments such as the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs). These allow various tax breaks on your investments to help increase your real returns. For instance, the former allows you to dispose of EIS without CGT provided the gains are reinvested into EIS companies.
However, many of these schemes are considered “higher risk – higher potential reward”. So, you need to ensure that your risk tolerance is accommodated.
Conclusion
The UK tax system is complicated and has changed over the years as new governments have taken office, and significant events (e.g. the Great Recession) have led to big policy changes. There is still much you can do to reduce needless tax in 2022. Make sure that you and your loved ones are not missing out.
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