From April, we’ll all be paying more tax. With increasing taxes and the rising cost of living it’s essential to understand how your finances could be affected.
To help meet some of the costs incurred in dealing with theCovid-19 pandemic, the Chancellor announced in his 2021 Budget that a number of allowances and thresholds will remain at their 2021/22 levels until 6 April 2026. This will mean that those investing will need to understand where tax pressures will come from.
It’s not just the hike in National Insurance and dividend tax rises that mean you’ll be paying more. There are additional reasons you’ll be parting with more of your money in the year ahead.
We’ve shared 5 great ways you could cut your tax bill in 2022.
First, let’s take a look at what’s changing and why we’ll be paying more tax from April.
The standard Personal Allowance is £12,570, which is the amount of income you do not have to pay tax on. The chancellor has frozen this along with the 40% higher rate which remains at £50,270. The additional-rate threshold hasn’t moved from £150,000 since it was introduced in 2010.
Its predicted that these freezes will see the number of workers paying the basic rate increase by as much as 5 million in a 3 to 4-yearperiod. That along with the estimated number of higher rate taxpayers doubling to 8 million means that this could potentially generate as much as £40 billion more for the Government.
From April, National Insurance will rise by 1.25 percentage points to raise extra funds for the NHS and social care. This will affect everyone under state pension age who is earning more that £823 per month. Recently confirmed in the Spring Statement; the chancellor also confirmed that on the 6th July 2022 the threshold for paying National Insurance will rise. Meaning that from then on you will not pay NI until your earnings exceed £1,047 a month.
This means around 70% of those in employment will pay less National Insurance next year than they will this year. Although, the main tipping point comes at just over £40k and those who earn £50k will still pay £197more than they do right now.
If you own a business and pay yourself in dividends, or you make over £2,000 per tax year in dividends outside of a pension or ISA, you will face more tax. This is confirmed to rise in the new tax year.
Currently, basic-rate taxpayers pay 7.5% on any dividends they receive over the £2,000 dividend allowance. From April 2022, this rises to8.75%. This will rise to 33.75% and 39.35% for higher-rate and additional-rate taxpayers respectively. These increases are set to cost investors a huge £815 million a year by 2025/26.
With the prices increases on all goods as part of inflation, we’ll see tax rises on everything too. Higher prices automatically mean paying more VAT.
The impact of this is evident in the recent rise in price of petrol. During the Spring Statement, the chancellor confirmed that from 6pm on23rd March that that fuel duty will be cut by 5 pence per litre and that this would be frozen until March 20223 to help ease the pressure of the rising costs.
If you are a UK household council tax payer, you will have noticed your recent statement for the year ahead will have risen by around2.99%, dependent on where you live. In percentage terms this doesn’t sound like much but as council tax rates are already high, this is quite an increase to your monthly outgoings. For example, a house in band D will pay an average of£56.94 extra for the year.
The stamp duty that was introduced in July 2020 during the peak of lockdown is now over. This means that those looking to buy in 2022 will need to source greater funds to do so.
With the average property cost already rising, homebuyers will again be presented with large tax bills associated with the cost of moving house.
Capital Gains for Property Investors
Rising house prices also raise the question of Capital Gains Tax (CGT) for property investors. The rise of house prices by 10.8% in 2021means that there will be higher CGT bills for second property investors who sell up. Also, as the CGT threshold has been frozen so you’ll pay tax if you realise more than £12,300 in capital gains in a single year.
Inheritance tax (IHT) will be frozen to raise more money. Therefore, the nil rate band will be frozen and remain at £325,000 and the residence nil rate will remain at £175,000. The inheritance tax annual gift allowance again remains at £3,000. As mentioned previously, given the increase in house prices, this means estates will ultimately have more inheritance tax to pay.
Here are five tips to help you avoid paying out more than you need to.
Tip 1: ISAs
With a Stocks and Shares ISA, you can currently invest£20,000 each year which enables you to shelter your money from capital gains tax and UK income tax. Plus, if your investments increase in value, you won’t have to pay CGT when you sell them. You also won’t pay UK income tax on your ISA investments if they make money either. Withdrawals are tax free. This can all be helpful if you’re likely to be impacted the upcoming dividend tax hike.
If you’re looking to save for a first-time home purchase and are between the age of 18-39, you can open a Lifetime ISA. You can pay into it every year until you’re 50 with tax free growth on your investments you’ll also get a 25% bonus on contributions. That means if you can save up to £4,000 each tax year and the government will give you a bonus of up to £1,000. You need to have had the LISA open for at least 12 months to be able to use it (and the bonus) towards your first home. Alternatively, you can wait until your 60 and take your money out then with no 25% penalty.
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 turn it into an adult ISA.
Investments can fall as well as rise in value, so you could get back less than you invest. If you're not sure about investing, seek independent advice.
Tip 2: Pensions
Contributing money to a pension offers a tax-efficient way to save towards retirement and an opportunity to cut your tax bill in a variety of ways. This includes the potential to preserve your long-term investments from dividend and capital gains tax and lower your income tax liability.
You can usually get a top up from government in the form of tax relief on contributions to your pension. Plus, the first 25% withdrawn from a pension from the age of 55 (57 in 2028) is commonly tax free.
A UK resident under the age of 75 will automatically get 20%basic-rate relief added to payments into a personal pension, even if they don’t pay tax.
You can usually pay in as much as you earn up to £40,000each tax year across all your pensions, and get tax relief. If you earn £3,600or less (including non-earners) you can still pay in up to £3,600, including tax relief.
The tax benefits are even more appealing if you’re a higher-rate taxpayer. A further 20% or 25% can be claimed back tax relief through your tax return.
Pension and tax rules can change, and benefits depend on your circumstances.
Tip 3: Salary Sacrifice
The government will let you, in some cases, give up a portion of your salary to spend on particular tax-free things. This can include pensions, cycle to work schemes and tech schemes. This won’t increase your take home income but it will cut your tax bill. It can be beneficial to speak to your employer about any salary sacrifice schemes they might offer.
Tip 4: Sharing Assets with a Spouse
For tax purposes, transfers of shares between spouses or civil partners are generally tax-free. This can be helpful when managing your tax bill if one of you is approaching an allowance limit.
Tip 5: Marriage Allowance
If one spouse is a non-taxpayer, and the other is a basic-rate taxpayer, the marriage allowance lets the non-taxpayer give £1,260of 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.
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The information and data in this article were correct at the time of publishing and every attempt is made to ensure its accuracy. However, it may now be out of date or superseded. Blue Rocket Accounting make no representation or warranty of any kind regarding the content of this article and accept no responsibility or liability for any decisions made by the reader based on the information and/or data shown here.