Budget 2021 – a round up

While the alcohol duty shake-up was perhaps the most striking part of the 2021 Budget, inflation forecasts and the tax rises unveiled in September will have a bigger effect on your financial plans.

Chancellor Rishi Sunak has been a busy man of late. While he is unlikely to experience many ‘slow’ workdays, plugging the gaping financial hole left by the coronavirus pandemic needs to happen sooner rather than later.

The Budget is the government’s annual centrepiece to lay out its future fiscal plans, including key changes to the UK tax system. This year, however, the government’s tax shake-up was unveiled on 7 September as an emergency measure to plug holes in health and social care funding. National Insurance contributions (NICs) – affecting businesses, employees, and self-employed workers – will increase by 1.25 percentage points from 6 April 2022. Dividend taxation is to rise by the same amount with the aim of discouraging the self-employed from incorporating in order to avoid the NIC increase by paying themselves in dividends.

However, the 2021 Budget wasn’t completely devoid of eye-catching data; Mr Sunak announced that inflation is forecast to hit an average of 4% in 2022 and could reach close to 5%¹. In this month’s newsletter, we explore how the recent tax changes and broader economic outlook might affect your personal finances.

Inflation

Inflation poses one of the biggest risks to meeting your financial goals as, over time, it slowly chips away at the purchasing power of your money.

With the Bank of England base rate still hovering at an all-time low of just 0.1%, and likely to remain low for some time yet, it places significant pressure on anyone with large amounts held in cash. Failure to achieve returns over and above inflation means your money is losing value in real terms.

There are scenarios where holding cash is sensible, even if it means sacrificing inflation-beating returns for easy access. These include money set aside for emergencies or short-term needs.

Whenever recommending investment solutions for our clients we always take inflation and its effects into account when considering your core objectives. Our expert financial planners will work with you to help you meet both your short-term and long-term goals.

Tax and national insurance

Let’s start with a brief round-up of the proposed changes.

  • 25 percentage point rise in NICs from April 2022 for employees, employers and the self-employed.
  • From April 2023 onwards, the new Health & Social Care Levy (HSCL) becomes a separate tax on earned income with NIC rates returning to their current level.
  • Workers over State Pension age who currently don’t pay NICs will have to pay the 1.25% levy from April 2023 onwards.
  • Tax rates on dividends will increase by 1.25 percentage points in April 2022.

Whenever the government changes the tax system, it’s prudent to take stock of the potential impact on your personal circumstances. Understanding what these changes might mean for you lets you take action to minimise any impact on your long-term financial goals. Here we outline some things you might want to think about.

Dividends

Dividends are usually payable twice-yearly to people who own shares in a company; you can own the company shares either directly or collectively within a fund. It’s worth pointing out that while most companies pay dividends, they don’t have to as they could choose instead to retain the money within the firm for reinvestment.  This is a difficult balance, as dividends attract people to buy the shares, whereas reinvestment may be a better option for the longer-term financial performance, so leading to greater profits and larger dividends in the future.

Like many other sources of income, dividends are taxable, with the amount being dependent upon the top rate of income tax you pay.

 Tax band Current rates 2022-23 tax year
Basic rate (20%) 7.5% 8.75%
Higher rate (40%) 32.5% 33.75%
Additional rate (45%) 38.1% 39.35%

So, what action can you take here?

If you’re an investor, your first port of call should be to ensure you’re making the most of the tax-efficient wrappers available. Dividends paid out by stocks held within individual savings accounts (ISAs) and self-invested personal pensions (SIPPs) aren’t subject to income tax, helping your money to grow more quickly and efficiently. However, although ISAs and SIPPS are tax efficient there are limits on what you can pay in every year. It’s also important to make sure they are suitable for your individual circumstances and objectives.

National insurance (NI)

Though not strictly a ‘tax’, NI functions in very much the same way, and is payable on any money you earn.

 Tax band Current rates 2022-23 tax year
Employees 12/2% 13.25/3.25%
Employers 13.8% 15.05%
Self-employed 9/2% 10.25/3.25%

How can you soften the blow?

If you’re an owner and director of a private limited company, pensions can prove a prudent way of reducing your liability to NI, putting more in your pocket and less in HMRC’s. Pension contributions paid by the company are deemed an allowable business expense, attracting relief from both corporation tax (19%) and NI (15.05% from April 2022). This means that every £100 you pay into a pension saves you £34.05 in tax and NICs.

Another pension solution becoming more attractive from April 2022 is salary sacrifice. Employees forfeit part of their salary in exchange for an equal amount paid by their employer into a pension scheme. While this will result in a lower salary for the employee, which could be detrimental for borrowing purposes, the employer pays the total pension contribution, meaning both parties pay lower levels of NI.

Next steps

Whether you are a business owner considering the merits of using pensions to streamline tax for yourself, your company and your employees, or an individual seeking to invest for your long-term future, we would always encourage you to seek professional advice. If you are concerned about the impact of anything mentioned in the Budget or this article, please do get in touch.

¹BBC – Budget 2021: Price rises could hit highest rate in 30 years, says forecaster