With the end of the tax year looming, we take a look at all of the financial changes happening in April 2022. Although we have previously touched upon these here. We are rounding up everything you need to know to move forward.
As we have reported over the last year, from this April (2022), consumers are due to face higher taxes, larger bills and greater costs, so here are some of the looming changes and some key points on how investors can weather the tax rises.
1. Frozen tax thresholds
Personal tax-free allowances will now be frozen at £12,570, with the higher rate threshold £50,270, both staying the same until 2026: so these won’t rise along with inflation.
Chancellor Sunak has also announced that these allowances will be frozen until 2026:
2. Pensions lifetime allowance
High-earning doctors and NHS consultants are among those due to be hit by the pension lifetime allowance being frozen at £1,073,100. This will affect defined benefit pensions and cap the retirement saving plans fir future generations: that will partly depend on the cost of inflation for the next four years.
3. CGT allowance
The CGT allowance will now freeze at £12,300 until 2026. Capital Gains Tax is usually avoided by often viewed as an avoidable tax, as a result of an annual allowance of £12,300 gains and a £20,000 ISA allowance. So landlords and second home owners will be hit by CGT as they cannot avoid it under the new rules.
4. IHT threshold and Main-residence Nil-rate Band
This relates to shares and house prices: a frozen IHT threshold of £325,000 and £175,000 will affect estates, so while the freeze will bring in an extra billion, estate owners will bear the brunt.
5. New social care tax
National Insurance is due to rise by 1.25 percentage points for employees in April, and 1.25% for employers. This will raise £12.7 billion for health and social care services this year alone.
6. Dividend tax rates
The Treasury is also increasing the dividend tax by 1.25% in lie with social care costs: from 7.5% to 8.75% for basic rate taxpayers and from 32.5% to 33.75% for higher rate payers. Additional rate taxpayers will rise from 38.1% to 39.35%: this will mostly affect company directors who draw an income in dividends. Taxpayers will still be allowed £2,000 of tax-free dividends.
7. Energy price cap
From April, the average bill will go up by £693 a year to £1,971: this is the one many people are worried about because 22 million households will be spending an extra £693: this translates to UK energy bills going up by more than £15bn. Shockingly this means that 25% of UK homes will be in fuel poverty from April, and will greatly struggle to pay their bills.
The rise will strongly affect older people, with 40% of pensioner households also expected to be in fuel poverty as a result of the energy price rises.
8. National Living Wage increase
The National Living Wage will go up to £9.53 an hour, but it should be taken into account that inflation is due to rise concurrently by 7%, so in the long run that won’t mean a huge amount of extra money for workers.
9. VAT rate for hospitality businesses
In April, the previously lower rate of 12.5% for hospitality businesses will go back up to 20%. Restaurants, hotels and bars have all struggled with rising bills and lower income due to the pandemic. Many will be forced to increase their prices to cover overheads and running costs.
10. State pension increase
The government suspended the Triple Lock last year, which could have increased State Pension increase by 8% in line with earnings: it will now rise by 3.1%, going from £137.60 per week to £141.85 per week in April, with the New State Pension rising from £179.60 per week to £185.15 per week.
Again, if inflation gets to 7% this year, this will not feel like a beneficial change when offset by pensioners’ higher energy bills and council tax rises.
How to beat the odds
Investors and savers can take a few measures to keep their tax bills down in the light of all the above unedifying news.
If you’re a higher rate taxpayer, a pension contribution is a good idea because for each £800 you put in, the government adds £200 to your pension: even if you’re a basic rate or non-taxpayer, with certain limits.
Higher rate taxpayers will then get £200 their tax bill when they complete their tax return. And if you contribute to a workplace pension, your employer may sort this for you automatically.
Stocks and Shares ISAs
Stocks and shares investments will mature free from Capital Gains Tax and Income Tax. The amount of gains you can make annually before paying CGT have been frozen until 2026 at £12,300 until 2026. So investors may face paying more tax on their gains, if investments aren’t held in a tax shelter such as an ISA. Dividends are also tax-free in an ISA, up to £4000.
The LISA is essentially a government top up of 25% on annual contributions up to £4,000 a year. You are eligible to set one up if you are under 40, and can add to it until you’re 50. You can only draw on a LISA to buy your first property, or once you reach 60 years old: otherwise there is a withdrawal charge of 25%, but a LISA can be a tax efficient way to save for a house however, or as a supplement or different option to a private pension for basic rate taxpayers.
If you’re married/in a civil partnership, you can transfer assets between you with no capital gains, so that’s two lots of the £12,300 CGT allowance: a savings of £2,460 in CGT if you’re a higher rate taxpayer selling shares. You can then potentially save up to £40,000 from future income or capital gains tax.
Death and wills are not easy things to discuss but an AIM portfolio can help you minimise your inheritance tax liabilities, by investing in qualifying AIM companies which are immune to inheritance tax if you hold them for two years or more.
VCTs and EIS’s can reduce tax liabilities by investing in very small, with high risks and and low liquidity, but with potential tax benefits. A VCT will net you 30% tax relief on investment, up to £200,000 per tax year, but the investment must be held for at least five years to keep this benefit. Dividends and growth are tax-free.
With an EIS, you can also net 30% income tax relief and defer CGT. An EIS is normally free from Inheritance Tax after being held for two years too, but always do the reading around these higher risk ventures. Sometimes they’re worth it to save some tax, sometimes the risk just isn’t justified.