The Chancellor, Rishi Sunak, announced his Autumn Budget at the end of October. It confirmed a series of tax rises which are likely to impact household budgets across the UK.
Within 5 years, total Government spending is on course to reach 41.6% of GDP, the highest level since the 1970s. To support this, taxation as a proportion of GDP is expected to rise 36.2% by 2026-27; its highest since the Labour Government under Clement Attlee, between 1945-51.
This appears to have been received well by many Conservative MPs representing the former “Red Wall'' (e.g. in the north of England), but those on the “fiscal right” in the party are unhappy with the tax rises - arguing that they go against the Conservatives’ values of “Small state, free enterprise” and the party’s traditional voting base.
In this article we take a look at which taxes are rising, exactly, and how these might affect your finances and wealth in the months ahead.
Dividend tax rise
One of the key announcements from the Autumn Budget was the planned dividend tax rise, by 1.25%, from 6th April 2022. The cited reason was to help fund UK health and social careFor Basic Rate taxpayers, this means that their dividend tax rate will rise from 7.5% to 8.75% in the 2022-23 tax year. Those on the Higher Rate will see their dividend tax rate rise from 32.5% to 33.75%, whilst for Additional Rate taxpayers it will go up from 38.1% to 39.35%.
Much of the public appears to accept this rise, but it has been described by many brokers as a “kick in the teeth” for investors - particularly after the recent “dividend drought” caused by COVID-19.
To mitigate the impact on your own finances, a range of options can be discussed with your financial adviser. First of all, remember that UK residents are each entitled to earn up to £2,000 in dividends per financial year, outside of a pension or ISA, without tax. Secondly, you can also put up to £20,000 into an ISA per year and generate dividends within the wrapper, tax-free. So, one option to reduce needless dividend tax is to organise your portfolio to make maximum use of both tax-free options.
Finally, any dividends generated within a pension (e.g. a SIPP) will be free from dividend tax. You can commit up to 100% of your salary into your pension(s) each year, or up to £40,000 (whichever is lower). Bear in mind, of course, that these dividends will need to be re-invested until you reach age 55 (rising to 57 in the coming years), at which point you can start to access your pension pots.
National Insurance increase
Another outcome from the Budget was the planned rise in National Insurance for employees, by 1.25% from April 2022. This will appear as a separate item on payslips, as a Health and Social Care Levy, from the following April. The proposal has sparked some anger as it breaks a pledge in the 2019 Conservative election manifesto, although the public appears split on the matter. Self-employed people and employers will also need to pay an extra 1.25%, and pensioners who work will need to pay National Insurance for the first time (in an effort to spread the tax burden across all age groups).
If you want to legitimately reduce your National Insurance liability, then there are a few options that could be explored. One idea is to engage in a “salary sacrifice” scheme with your employer, where you reduce your take-home pay in exchange for higher pension contributions from your employer. This means that both you and your employer should pay lower National Insurance Contributions, and in some cases can even increase take-home pay. However, think carefully before suggesting this to your boss. If your employer offers you life cover, for instance, then this is often worked out as a multiple of your salary. By reducing your salary, you may therefore end up reducing your “death in service” benefits. Your new, lower salary could also affect how much you could borrow when looking for a mortgage, and might affect your eligibility for certain state benefits (e.g. Statutory Maternity Pay).
Future tax cuts?
On Wednesday 27th October, Chancellor Sunak told the 1922 Committee that “Every marginal pound we have should be put into lowering people’s taxes”. Furthermore, he stated his aim to cut taxes over the course of this parliament due to his beliefs as a “fiscal Conservative”. This leads some analysts to believe that, in the short term, taxes will rise but might be cut as the general election approaches in 2024.
However, the big threat hanging over this outcome is a possible rise in interest rates in the coming years. If the base rate eventually rises to, say, 3.5% (i.e. its highest since 2008 and the level likely required to moderate inflation pressures assumed by the OBR), then this would significantly increase the UK’s borrowing costs. For instance, just a 1% rise in the base rate and inflation may lead to a £23bn increase in debt servicing costs. If this rose threefold, then it could cost the UK an extra £72bn per annum and would make it very difficult for the Chancellor to reduce taxes. This scenario is, of course, uncertain. Yet it should caution against optimism that taxes will inevitably reduce, at some stage, under the present Government.
Tax treatment will depend upon individual circumstances and may be subject to change in the future.