Prepare for a greater tax burden
The government is raising taxes to help recoup the cost of the COVID-19 pandemic, but there are ways you can manage tax to lessen the load.
The quick read:
- Individuals and businesses are facing higher taxes, but good financial planning can mitigate the impact.
- Ensure you make best use of your tax allowances such as pension tax relief and ISA limits for each member of your family.
- Financial advisers understand the intricacies of taxation and can help you plan for today and future years.
It’s inevitable that over the next few years businesses and citizens in countries around the world will face a greater tax burden to help pay for the cost of the COVID-19 pandemic. The UK is no different and that means people will have to pay more attention to their tax affairs to help reduce the pain.
Tax can be a tricky area with lots of niche rules and frequent changes. It’s always best to seek out expert advice that’s tailored to your individual situation – no two people have exactly the same income, savings, assets and family set-up, so tax planning is a very personal thing.
That said, anyone can understand the basics. Here’s a brief overview of what you need to know about the forthcoming tax increases, alongside some of the key things that financial advisers consider when helping clients.
The government has announced a number of tax changes, many of which take effect from 6 April 2022, the start of the new tax year. These include:
Paying National Insurance allows individuals to build up an entitlement to the State Pension and other benefits. As with pensions, employers make National Insurance payments on behalf of their staff, and employees also contribute.
From April 2022, the rates will increase by 1.25%. Which ‘class’ of National Insurance you pay depends on your employment status:
- Class 1 for employees, who will pay 13.25% and 3.25%
- Class 1 for employers will rise to 15.05%
- Class 4, which the self-employed pay on their profits, will go up to 10.25% and 3.25%
Those receiving the State Pension will not have to pay these higher rates. Find out more
Health and social care levy
The government will drop the increase to National Insurance from April 2023 and instead people will pay a 1.25% ‘health and social care levy’ from their income.
Some people with stock-market investments, or limited-company directors who pay themselves with dividends, already have to pay some tax on the dividends they receive (after the first £2,000, which is tax-free). How much depends on their earnings, how much they make from their investments and the kind of account that their shares are held in.
The government plans to increase the rates of tax applicable to dividend income by 1.25%. From April, the rate for basic-rate taxpayers will be 8.75%; for higher-rate taxpayers, it will be 33.75%, and those on the additional rate of income tax will pay 39.35%. Find out more
Clever tax planning
As you can see, there are intricacies to tax that mean it’s best to have a professional manage your affairs. A financial adviser will ensure you’re paying the correct rates of tax in each tax year – which is vital for those with investments and assets, as well as for small-business owners who have varying income from year to year.
People tend to frame tax as something that’s deducted from your income, leaving you less well-off. But there’s another side to tax. You can offset some of these deductions by boosting the amount that you put into pensions, where tax relief effectively reduces the amount of Income Tax you pay, and with ISAs, where you can shield more of your money from tax liabilities.
Most adults can save up to £40,000 per year or the equivalent of 100% of earnings, whichever is lower, into a pension. The contributions attract tax relief, which means some of the tax you would have paid goes into your pension instead, boosting your retirement fund.
The best thing to do is maximise your pension contributions and don’t forget that you can also perhaps pay into your partner’s pension. Children can also have pensions, which receive tax relief (even though most children don’t work or pay tax!), so giving them a head start is a great way to make the most of any additional savings you may have.
An adult can put up to £20,000 each year into a Cash ISA or Stocks & Shares ISA, and they don’t have to pay tax on the interest or investment returns made within the ISA.
If you have reached the limit, help your partner max out their allowance. The under-18s can have a Junior ISA, which has an annual limit of £9,000, and there is also a Lifetime ISA, which can be opened by those aged 18-39.
You can save a maximum of £4,000 per year into a Lifetime ISA and the savings receive a 25% cash bonus from the government – with the proviso that the money is used only to buy a first home or for later life.
These allowances are there for people to use, and it always makes sense to take advantage of as much of your entitlement as you can in every tax year.
A financial adviser can help you manage your tax effectively. Speak to a St. James’s Place Partner now.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.
An investment in a Stocks and Shares ISA will not provide the same security of capital associated with a Cash ISA or a deposit with a bank or building society.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are dependent on individual circumstances.
Please note that St. James’s Place does not offer Cash or Lifetime ISAs.