Financial Changes April 2022: As April marks the start of the new tax year, as we have been reporting over the last few months, this April 2022 poses some big changes. Many of which mean that consumers will face higher taxes, bigger bills and increasing costs from this April. AJ Bell’s head of retirement policy, Tom Selby, looks at some of the key changes we can expect to start hitting UK purses in just a few weeks’ time, and how investors can shield themselves from tax rises.
1. Income tax thresholds frozen
Probably the biggest change coming in from 6th April will be that the personal tax-free allowance will be frozen at £12,570, and the higher rate income tax threshold will be frozen at £50,270. Normally these thresholds would be expected to increase broadly in line with inflation, in order to offer some protection to taxpayers. But in March of last year, the Chancellor announced that from this coming April, they would be frozen until 2026. The Treasury forecast this will cost taxpayers £1.6 billion in the tax year beginning April 2022, and a total of £19.2 billion by 2026.
The examples below show estimates of what taxpayers might pay in extra taxes as a result of income thresholds being frozen until 2026, depending on their income. The figures are based on OBR expectations for inflation and average earnings increases published alongside the Budget last October. Those getting paid around the higher rate threshold (frozen at £50,270) get hit pretty hard, because inflationary increases in the threshold would ordinarily have offered some protection against paying higher rate tax.
Income tax payable 2022/23 to 2026/27
Sources: AJ Bell, OBR
Assumptions: Wage growth and inflation rise according to OBR forecasts form October 2021, income tax rates remain the same, individuals receive no additional income or income tax reliefs
Last March, the Chancellor also announced that the following allowances would be frozen until 2026:
2. Pensions lifetime allowance frozen at £1,073,100
While freezing the pension lifetime allowance at just over £1 million might sound like a relatively minor move aimed at the wealthiest in society, large swathes of middle Britain are now at risk of being dragged into its net. High-earning doctors and consultants in the NHS who benefit from generous defined benefit pensions, for example, will be among those hit by this measure. Furthermore, the longer it is kept at the current level, the more it will cap the retirement saving aspirations of future generations. The impact will depend in part on what happens to inflation over the next four years. Freezing the allowance while inflation rises sharply actually equates to cutting it in real terms.
3.CGT allowance frozen at £12,300
The CGT allowance is also to be frozen at £12,300 until 2026. Capital Gains Tax is often viewed as an avoidable tax, as a result of the £12,300 of gains that can be made each year tax-free, plus the £20,000 ISA allowance which protects investments from CGT. The group probably most at risk from higher CGT are landlords and second property owners, as houses can’t be sold in chunks to realise £12,300 of profit every year, nor can they be put in an ISA.
4. IHT threshold and Main-residence Nil-rate Band frozen at £325,000 and £175,000
As the price of shares and houses rise, a frozen IHT threshold will start to bite into estates. The Treasury expects the freezing of the IHT allowance to bring in an extra £1 billion between now and 2026, so it will be a substantial burden for those estates which grow in value in the next few years.
5. New social care tax
National Insurance increases by 1.25 percentage points for employees in April, and 1.25% for employers too. The government is expecting to raise £12.7 billion on this measure in the next tax year alone, to be spent on health and social care services.
Take someone who is employed with total taxable earnings of £30,000. In 2021/22 they would pay National Insurance @ 12% on earnings between £9,568 and £30,000, leaving them with a total NI bill of £2,451.84. In 2022/23 the threshold at which employees start paying National Insurance is rising to £9,880, so NI @ 13.25% above this level would leave them with a total NI bill of £2,665.90.
6. Dividend tax rate increases
As part of the new social care tax measures, the Treasury is also increasing the dividend tax by 1.25% in April, so that the tax rises as follows.
Basic rate taxpayers rise from 7.5% to 8.75%.
Higher rate taxpayers rise from 32.5% to 33.75%.
Additional rate taxpayers rise from 38.1% to 39.35%.
This measure is expected to raise £1.3 billion in the coming tax year and will hit company directors who draw an income in dividends, as well as investors who haven’t wrapped income-producing assets in an ISA or SIPP. Taxpayers will still be allowed £2,000 of dividends tax-free, but anything above that will be taxable.
Take someone who owns their own company and pays their salary entirely in dividends. In 2022/23 they expect to pay themselves £50,000 in dividends.
The first £12,570 of income is within the personal allowance and so taxed at 0%. The next £2,000 of dividend income is tax-free via the dividend allowance. The remaining £35,430 falls within the basic-rate tax band.
If they had earned that much dividend income in 2021/22 they’d be taxed @ 7.5%, leaving them with a £2,657.25 tax bill. In 2022/23 they will be taxed @ 8.75%, leaving them with a £3,100.13 tax bill.