The recent Autumn Budget confirmed impending changes to National Insurance (NI) and dividend tax rates. These changes, along with others, may impact your finances in the short term, and your wealth in the longer term. In this article, we look at how the Budget could affect you and what you can do about it. We hope you find this article helpful. Please contact us if you would like to discuss your situation with your Financial Planner.
Dividend tax rise
The Government has announced that dividend tax will rise by 1.25% from April 2022 to help pay for the NHS, and also the new social care cap (which will be set at £86,000). Basic rate taxpayers, therefore, will see their rate rise from 7.5% to 8.25%, whilst higher rate taxpayers will see theirs go up from 32.5% to 33.75%. This not only applies to investments held in an online portfolio, but also to dividends received by company owners. Although these tax rises are coming along soon, there are still ways you can mitigate the effect of these changes.
Fortunately, each person will still be entitled to their annual dividend allowance from 2022, which lets you receive up to £2,000 without paying any dividend tax. Also, you still have your ISA allowance, where you can put up to £20,000 into your ISA(s) every tax year. Any dividends you receive from funds held in your ISA will be tax-free. So, one way to mitigate unnecessary dividend tax is to make sure you are using your annual dividend allowance and ISA effectively. For instance, if you use most of your £20,000 ISA allowance for cash but hold lots of dividend-paying shares in a general investment account (which exceed £2,000 per year), then this might not be optimal. Instead, you could commit more cash to a regular savings account so that you can move more of your dividend-paying investments in your ISA each year.
The National Insurance (NI) rise
In addition to the dividend tax rise in April 2022, the Government will also raise NI by 1.25% to help pay for extra healthcare spending. Also, the changes mean that about 1.3m pensioners will start paying NI for the first time i.e. the 10% of pensioners who are aged 65 or over, and who work in paid employment. This comes along with confirmation that the earnings link element of the triple lock system for increases in the State Pension will be suspended from April 2022, for one year.
For many over-65s, therefore, spending power could be constrained from April 2022, especially if inflation keeps rising above the Bank of England target of 2% (it could rise to 4% or more in the coming months). Therefore, it is important to make sure your monthly budget still has plenty of room to cover your essential spending. For some, it may be necessary to pull back a bit on discretionary spending in 2022 – especially if stock market turbulence impacts your retirement savings. For those in employment, however, it is important to recognise how the NI rise may affect your take-home pay. For someone on £20,000 per year, for instance, their total annual NI liability is likely to rise from £1,251.84 to £1,382.24 (a £130.40 increase). For a £40,000 earner, however, the amount could go up from £3,651.84 to £4,032.24 (a £380.40 increase).
Many households will be able to absorb this tax rise. However, others may need to tighten their monthly budget to avoid overspending. One idea to mitigate unnecessary NI liability, is to consider a salary sacrifice with your employer. Here, instead of a pay rise, you ask for an increase in employer pension contributions, which can often benefit both you and your employer. First of all, if you were going to put a potential pay rise into your pension anyway, this stops your NI tax bill rising (because NI liability is calculated on your gross salary). Also, this means that your employer’s NI does not go up either. This is because, like you, your employer pays NI based on your salary, but their contributions to your pension can usually be treated as an allowable expense for corporation tax.
You do need to be careful with this, however. In particular, remember that mortgage lenders will usually base their lending limits on a multiple of your salary. So, engaging in salary sacrifice may prevent you from borrowing as much as you might like to for a property.
Invitation
If you would like to discuss your financial plan and retirement strategy, then we would love to hear from you. Get in touch with your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.
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t: 01228 210 137
This content is for information purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.