The cost of living squeeze looks likely to be further constricted from April as rising taxes bite. How can you plan for the effect?
The biggest change to come is to National Insurance contributions (NICs). From 6 April these will increase by 1.25 percentage points across the board. For employees, the main rate of NICs will increase from 12% to 13.25%.
The new rate will be applied on earnings between £9,880 and £50,270. Anything over this will be subject to a 3.25% NI charge (up from 2%).
An employee earning £30,000 salary will lose an extra £214 a year; those earning £80,000 a year will pay an extra £839. Self-employed workers pay Class 4 NICs. These have increased by the same margin, to 10.25% and 3.25% for earnings over £50,270. Employers NICs are also increasing.
The government has introduced these higher rates first to boost funding for the NHS and then from 2023 to pay for social care costs, both under extra strain from the pandemic.
A 1.25% increase is also coming to dividend tax rates. Those running their own businesses, who pay themselves via dividends, rather than a salary, will be affected.
From April, those taking dividends from investments will also be hit as dividend income above £2,000 a year will be taxed at 8.75% within the basic rate band, 33.75% in the higher rate band and 39.35% in the additional rate band.
Frozen tax thresholds
Less obvious tax increases are coming in the form of freezes on several tax thresholds, including the personal allowance and the levels at which taxpayers start paying higher and additional rate tax. Over time more people will be dragged into higher tax brackets as earnings rise. Similarly the earnings level at which people start to pay back student loans, or become liable to a tax charge on their Child Benefit, have also been frozen.
Off-setting tax rises
You may not be able to avoid the tax rises completely, but there are planning strategies to try. They are likely to be most effective if your current earnings are just below one of the main tax bands.
Employees can opt for salary sacrifice. With your employer’s agreement, you effectively cut your salary, with the equivalent amount paid into your pension. This saves NI payments, which aren’t due on pension contributions. There is no immediate cash saving, as your take home pay will still be reduced, but you’ll be boosting your overall reward package (via pensions) rather than handing more to the taxman.
Care is needed not to breach the annual (£40,000) or lifetime (£1,073,100) allowances on pensions — both of which have also been frozen. Remember some benefits, such as maternity pay or life cover, are linked to salary so these may also be reduced.
It may be possible to bring salary, bonus or dividend payments forward but be careful this doesn’t push total earnings for that year into a higher tax bracket, which would outweigh the potential NI savings.
The value of tax reliefs depends on your individual circumstances. The Financial Conduct Authority does not regulate tax advice and tax laws can change.
The value of your investment and any income from it can go down as well as up and you may not get back the full amount you invested.