The UK government has confirmed rises in National Insurance and dividend tax, along with a backtrack on State Pensions. Peter Webb, our Head of Tax Advisory, explores what’s changing and suggests some actions which may help you reduce your exposure.
It was only a matter of time until Boris Johnson and his government shared how they would begin to tackle the growing issue of health and social care, against the backdrop of an ageing population and the impact of the pandemic. In a bid to begin to fix what’s seen as a growing crisis, Boris Johnson announced:
- From April 2022 National Insurance contributions for both employees and employers will increase by 1.25%.
- From April 2022 the Income Tax payable on dividends will increase by 1.25%.
- The State Pension will increase by an expected 2.5% from April 2022 (rather than the possible 8% increase that would have been due under the so called ‘triple lock’).
The additional funds, expected to generate £36 billion over three years, will fund the UK’s growing health and social care costs. Around a sixth of the revenue will be earmarked for social care with the balance paying for further funding of the NHS. A review of this split will be taken in 2025.
What about State Pensions?
Under a measure known as the ‘triple lock’ Boris Johnson had previously promised that, for the five-year life of this parliament, the State Pension would increase each year in line with either the rising cost of living seen in the Consumer Prices Index (CPI), increasing average wages, or 2.5% – whichever was highest. Using this calculation, the increase this year could have reached 8%, but it’s no real surprise that this was felt too high in the current climate, even though the decision breaks one of the Conservative’s manifesto promises.
Are these tax rises enough?
There’s no doubt that the NHS has been put under enormous strain by the pandemic, resulting in significant waiting lists for treatment. Extra funding will no doubt be welcome. However, there are concerns that simply providing extra funding for social care won’t fix the problem unless the way it’s delivered is fundamentally reformed.
Planning for the rises
Given these announcements, there may be some steps you can take to mitigate the tax rises:
- If you own your own company, consider the timing of your dividend payments. Will you save any tax by bringing dividends forward into the current tax year before these tax increases bite? And can you save tax by changing the way you take profits out?
- Review your existing investments and consider whether or not your strategy is still tax efficient. Ensure you are making the most of your tax allowances (including your valuable ISA allowance) each year.
- Against a backdrop of increasing taxes speak to a financial planner to consider other options for investing that would reduce your tax bill.
Given the possible £500bn cost of fighting the pandemic over the last two years it’s worth asking if more tax rises are on the way. Increasing National Insurance contributions and Income Tax and ignoring the triple lock on State Pensions all break Conservative election promises. When challenged Boris Johnson didn’t rule out further tax rises, and it’s worth noting that the Conservatives didn’t make any manifesto pledges not to increase Capital Gains Tax, which means it’s an obvious target for future tax rises. Although if, as we’ve seen, election promises aren’t going to be kept then it’s fair to say that all taxes are potentially on the table.
To discuss your own tax and investment plans please contact your nearest office.