10 big personal finance changes coming in April

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Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.

There are big changes afoot 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.

Example

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
Current income Frozen thresholds Inflation-linked thresholds Additional tax
£25,000 £14,808 £13,707 £1,101
£50,000 £46,621 £41,339 £5,282
£80,000 £112,449 £106,945 £5,505

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.

Example

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.

Example

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.

7. Energy price cap rises

From April, the rise in the energy price cap means the average bill will rise by £693 a year to £1,971. More than 22 million households will have to fork out that extra £693 a year on average from April, meaning that collectively, the nation’s energy bills will rise by more than £15bn. The increase also means more than a quarter of households in the UK are estimated to be in fuel poverty from April, where more than 10% of their budgets are spent on fuel bills, according to the Resolution Foundation. The increase means that many households, beyond the poorest, will now find it a struggle to pay their bills each month.

The rise will especially affect older people, who spend a larger proportion of their income on energy, with 40% of pensioner households now expected to be in fuel poverty as a result of the hike, according to the Resolution Foundation. Those living on the State Pension will find the bill increase hardest to stomach, as they will see fairly modest inflationary increase to their pension in April, at the same time as facing a far larger hike in their energy costs (see section on State Pension below).

Of course, one of the knock on effects of the Ukraine crisis is that energy prices have leapt upwards again, which means the UK may well face another big jump in energy prices when Ofgem next announces the price cap in October. Indeed, Ofgem has said it will update the price cap more regularly than every six months in ‘exceptional circumstances’. What precisely that means is up for debate, but it does mean households will have even less certainty about what price they will be paying for energy going forward.

8. National Living Wage increases to £9.50 for over 23s

There is some good news in the raft of changes which are coming in in April, which is that the National Living Wage will be seeing a big increase of 6.6%. This was confirmed by the Chancellor in October to great fanfare, however the reality is that with inflation expected to peak at 7%, maybe more, the rise in the National Living Wage will just about maintain the living standards of lower earners. In today’s inflationary environment that’s not to be sniffed at, but it doesn’t merit the celebrations that would normally accompany a 6.6% pay rise for so many people.

National Living Wage increases
  23 and over 21 to 22 18 to 20 Under 18 Apprentice
April 2021 (current rate) £8.91 £8.36 £6.56 £4.62 £4.30
Apr-22 £9.50 £9.18 £6.83 £4.81 £4.81

9. VAT rate for hospitality businesses increases

From 1st April the reduced rate of 12.5% for hospitality businesses will rise back up to 20%. Restaurants, bars and hotels have all been hit by the same rising costs as most of us, with increasing energy bills and food costs hitting their profits as they try to recover from the multiple closures the pandemic brought. The cut to VAT and staggered increase back to 20% has helped to prop up some businesses, and stop them from raising prices, but after VAT jumps back up in April, it’s likely many will be forced to increase their costs, meaning a meal out or a few nights away will cost that bit more.

10. State pension increases by 3.1% in April

The government chose to suspend the Triple Lock last year, which in theory would have seen the State Pension increase by around 8% in line with earnings. The State Pension will instead rise by 3.1%, in line with September’s CPI figure. As a result, the Basic State Pension will increase from £137.60 per week to £141.85 per week in April, and the New State Pension will increase from £179.60 per week to £185.15 per week. While an increase in the value of the state pension is better than nothing, with inflation running hot, this is going to mean pensioners feeling the pinch. If inflation hits 7% in April, this means that the increase in the New State Pension from £179.60 to £185.15 will actually feel like a cut to £173.04. The higher level of inflation we’re now seeing should then find its way into the State Pension increase in April 2023, but that still leaves a tough year ahead for pensioners, many of whom will also be facing higher energy bills and council tax payments too.

How savers and investors can beat the Chancellor’s stealth tax raid

With tax rises on the cards in April, savers and investors need to pull out all the stops to keep as much of their money sheltered from the coming tax storm as they can. Here are some of the key tools they can make use of to keep their tax bill down.

Pension contributions

If you’re a higher rate taxpayer, or become one soon, a pension contribution is a good way to reduce your tax bill. For each £800 you put in, the government adds £200 to your pension, even if you’re a basic rate or non-taxpayer, up to certain limits. Higher rate taxpayers can then also knock a further £200 of their tax bill, which they would normally pay when they complete their tax return. If you contribute to a workplace pension, chances are your employer will get the extra tax relief applied automatically, you won’t have to claim it.

The net effect is you get £1,000 in your pension, and as a higher rate taxpayer it only costs you £600. Your investment growth and income are then tax-free inside the pension, and you can take 25% of your total pot as a tax-free lump sum at retirement. The remaining pension income your draw is taxable, but in retirement, you’re likely to be paying a lower overall tax rate than when you’re working. The Chancellor did also freeze the pensions Lifetime Allowance at £1,073,100, so if you’re lucky enough to be bumping up against this, you need to think twice before adding more money to your pension.

Stocks and Shares ISAs

You don’t get upfront tax relief on a Stocks and Shares ISA, but your investments grow free from Capital Gains Tax and Income Tax. The Chancellor has frozen the annual amount of gains you can make each year before paying CGT at £12,300 until 2026, and the Office for Tax Simplification (OTS) has recommended the Chancellor reduce the allowance to between £2,000 and £4,000 a year. The OTS also suggested he should raise the CGT rate, so a frozen allowance probably isn’t the worst outcome for investors. But it does mean investors potentially paying more tax on their gains, if their investments aren’t held in a tax shelter like an ISA.

Dividends are also tax-free in an ISA. They are outside an ISA too, but only up to £2,000 a year, which on a portfolio yielding 4% equates to an investment value of £50,000. Even if you’re not there yet, you could well be in future, so it makes sense to protect yourself from dividend tax by making the most of the ISA wrapper. That’s particularly the case now frozen allowances are going to mean more people slipping into the higher rate tax bracket, alongside higher rates of dividend tax being imposed from April.

A basic rate taxpayer will pay 8.75% tax on dividends above £2,000 annually, a higher rate taxpayer will pay 33.75%, and an additional rate taxpayer will pays 39.35%, unless your investments are held in a tax shelter. You can contribute up to £20,000 each tax year to an ISA, and unlike a pension you can access it, tax-free, at any time.

Lifetime ISA

A relatively new addition to the ISA family is the Lifetime ISA or LISA, which provides investors with a government top up of 25% on annual contributions up to £4,000 a year. Unlike a standard ISA, you have to be under 40 to set a Lifetime ISA up, but if you do so you can continue contributing until your 50th birthday. The Lifetime ISA is also more restrictive than a standard ISA, as you can only draw on it in order to buy your first property, or once you reach the age of 60. If you withdraw your funds at any other time they will be subject to a withdrawal charge of 25%, which effectively reclaims the government top up and a little bit more by way of a penalty. The Lifetime ISA can be an extremely helpful and tax efficient way to save for a house however, or indeed as an alternative or supplement to a private pension for basic rate taxpayers.

Bed and ISA

This is simply funding an ISA using an existing shareholding, but it allows you to sell an investment up to the £12,300 CGT-free gain limit, and buy it straight back within the ISA. So you keep the same investment, but crystallise some tax-free gains, and protect future gains and dividends from tax to boot. If you want to switch out of the investment, you can simply buy a new fund or share in the ISA with the proceeds of the share sale.

Buddy up

If you’re married or in a civil partnership, you can transfer assets between you without incurring capital gains, which can allow you to use two lots of the £12,300 capital gains tax allowance if you have a large gain to crystallise. That could potentially save you £2,460 in capital gains tax, if you’re a higher rate taxpayer selling shares. You can then potentially perform two Bed and ISAs, sheltering up to £40,000 of investments from future income or capital gains tax.

AIM portfolios

The freezing of the IHT allowance at £325,000 is expected to cost taxpayers around £1 billion over the next five years, so older investors should give IHT ample consideration. It’s not always an easy conversation to have with family, and it’s a difficult tax liability to manage. Although death and taxes are certain, their timing is not. Investing in an AIM portfolio can help minimise inheritance tax liabilities, by investing in qualifying AIM companies which aren’t subject to inheritance tax if you hold them for two years or more. There are managed AIM portfolios out there, or more sophisticated investors can run their own. Investors considering this route should be cognisant of the risks involved in London’s junior market, and weight this part of their portfolio accordingly.

VCT and EIS schemes

Investors who have used up their ISA and pension allowances might consider VCTs and EIS’s to reduce tax liabilities. These invest in very small, often unquoted companies, so risks are high, and liquidity is low. But they do come with notable tax benefits. A VCT comes with 30% up front tax relief on investment up to £200,000 per tax year, but you must hold the investment for at least five years to keep this benefit. Dividends and growth are tax-free. With an EIS, you can also get 30% income tax relief, and defer capital gains. An EIS is normally free from Inheritance Tax after being held for two years too. It’s important not to let the tax tail wag the investment dog though. If an investment looks too risky, or unprofitable, it shouldn’t be taken on just because it saves some tax.

How you're taxed will depend on your circumstances, and tax rules can change. Remember that the value of investments can change, and you could lose money as well as make it. Past performance is not a guide to future performance.

These articles are for information purposes only and are not a personal recommendation or advice.


ajbell_Tom_Selby's picture
Written by:
Tom Selby

Tom Selby is a multi-award-winning former financial journalist, specialising in pensions and retirement issues. He spent almost six years at a leading adviser trade magazine, initially as Pensions Reporter before becoming Head of News in 2014. Tom joined AJ Bell as Senior Analyst in April 2016. He has a degree in Economics from Newcastle University.