As the cost of living continues to rise, and it feels like our budgets can't be squeezed anymore, the taxman will soon wade in to deliver another terrible blow.
The amount of tax we pay almost doubled between 2001/2 and 2019/20. It did fall back during the pandemic, but the new financial year will see taxes soar further. And it can be important to understand what is happening and how we can best protect ourselves.
Financial experts at Hargreaves Lansdown have listed eight ways our taxes will rise from next month. The list includes a variety of payment increases, and here we take a closer look at them. Some tips on how to make sure you are paying the correct amount of tax can be found further down this article.
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National Insurance
National Insurance will rise by 1.25 percentage points, and affect everyone under state pension age earning more than £9,880 from wages, The size of this tax hike doesn’t sound dramatic, but that doesn’t translate into a 1.25% rise in what you pay.
Someone earning £30,000 currently pays £2,452 a year in NI, and the rise would increase it by £256. That’s effectively a rise of over 10% in their NI bill. Everyone who pays NI will take a hit, but for those whose finances are on a knife-edge, this could be a devastating blow.
The National Institute of Economic and Social Research has calculated that could push 30% more people into destitution – so they can’t afford the basic essentials in life.
Income tax
The personal allowance – how much you can earn before paying tax – has been frozen at £12,570, and the higher rate threshold – the point at which you start paying 40%, has stuck at £50,270. The additional rate threshold hasn’t moved from £150,000 since it was introduced in 2010.
When the freezing of the tax thresholds was announced, the Office for Budget Responsibility (OBR) calculated that by 2025/26 we’ll be paying £8.2 billion more a year in income tax as a result. However, the higher inflation is, the higher this bill is likely to be.
As prices rise, employers will be under pressure to raise salaries, so their staff can afford to live. Salaries rising will automatically increase the amount of tax we pay, but the frozen thresholds also mean that the more wages rise, the more people will cross the frozen thresholds to pay a higher rate of tax.
Calculations in January showed that 1.5 million will start paying income tax, while 1.2 million will move into a higher tax bracket.
Council tax
Councils will be able to raise rates by up to 3% from April. This could mean the average tax on a house in Band D rises £56.94 from £1,898 to almost £1,955 next year. It’s another rise that doesn’t sound too terrifying in its own right, but really adds up. It’s up by more than a quarter over the past decade (26%).
VAT
Inflation, and therefore higher prices, will automatically feed through into us paying more in VAT. With prices climbing on everything from furniture to fashion, we’ll see the tax on everything rise too.
You can see the impact of rapidly rising prices by looking at what has recently happened to petrol. VAT is charged at 20% on petrol, which has typically been around 20p per litre over the past three years. At the moment it’s around 26p per litre. It means the extra VAT alone has added £3.30 to the cost of filling up a 55 litre tank.
Stamp Duty
Now the Stamp Duty holiday is over, homebuyers face large tax bills again – and those bills are rising. The last time there was a significant permanent change to stamp duty and its thresholds (aside from first time buyers and property investors) was back in December 2014 when the average house cost £191,669.
In the interim, the average has risen to £274,712 – almost 45%- dragging huge numbers of people into paying higher rates of tax.
Inheritance tax
Given how house prices are rising, it means more estates will have more inheritance tax to pay. By 2025/26 the OBR says the freeze in the inheritance tax threshold will cost us an extra £445 million a year.
Dividend tax
If you make more than £2,000 in dividends outside an ISA, or you own your own business and pay yourself in dividends, you’ll face tax, and the Chancellor will hike the rate by 1.25 percentage points from April. This is set to cost Brits £815 million a year by 2025/26.
Capital gains tax
For property investors, rising house prices also raise the question of capital gains tax. House prices are currently up 10.8% in a year, which is going to mean higher CGT bills for second property investors who sell up.
At the same time, the capital gains tax threshold has been frozen, so if you realise more than £12,300 in capital gains in a single year, you will pay tax. By 2025/26 this will cost us an extra £30 million a year.
How to pay less tax in 2022
ISAs
The government offers the chance to squirrel away £20,000 in this tax year – free of tax.If you’re saving to buy a first property, are aged 18-39, and have at least a year until you expect to buy, you should consider a LISA (Lifetime ISA), because in addition to tax free growth, you get a 25% bonus on contributions. You can save or invest £4,000 this tax year.
Don’t forget Junior ISAs too. In the current tax year, you can save or invest £9,000 in a JISA for any qualifying child, and all interest, dividends or capital gains are tax free.
Pensions
Contributions to pensions attract tax relief at your highest marginal rate, and the first 25% taken from the pension is usually tax-free. There’s tax relief on pensions even for non-taxpayers – on the first £3,600 a year. It means you can contribute tax-efficiently to a pension on behalf of a child.
Salary sacrifice
In some cases, the government will let you give up a portion of your salary, and spend it on certain things free of tax (and in some cases national insurance). This includes pensions, childcare vouchers, bike-to-work schemes, and technology schemes.
While this won't boost your take-home pay, it will cut your tax bill.
Spouse exemptions
Assets that produce an income can be passed between spouses without triggering a tax bill. They can therefore be shared between a couple, so that both take advantage of their allowances. The balance can be held by the spouse paying the lower rate of tax, to reduce the tax payable.
Marriage allowance
If one spouse is a non-tax payer, and the other is a basic rate taxpayer, the marriage allowance lets the non-taxpayer give £1,260 of their personal allowance to their spouse in the current tax year.
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