The Chancellor Rishi Sunak made a number of policy announcements last week that will affect how Britons pay tax in the forthcoming financial year. The changes are hoped to help ease the burden that households face due to rising energy bills and the cost of living crisis.
The tax year will finish on April 5, 2022.
Steven Cameron, Pensions Director at Aegon, explains each of the changes below:
1 State pension increases by 3.1 percent
The state pension under the triple lock is increased each year by the highest of earnings growth, inflation or 2.5 percent.
For 2022/23, the Government has removed the earnings component to avoid distortions created by the pandemic and furlough.
As a result, this year the state pension rises by 3.1 percent.
He said: “This is only half the current inflation rate of 6.2 percent and could leave those heavily reliant on the state pension, and already struggling with rising prices, severely stretched.
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“However, the Bank of England’s latest prediction that inflation might reach eight percent or more later in the year could mean that we see a bumper increase to the state pension in April 2023, thanks to the reinstating of the triple lock – now confirmed by both the Work and Pensions Secretary and the Chancellor.
“While not easing current pressures, it could at least make up for the below inflation increase this year.”
2 Minimum wage increase offers pensions benefit
The National Living Wage (NLW) will increase by 6.6 percent from £8.91 to £9.50 an hour.
Mr Cameron explained that this is not only good news for income, but it also brings with it increased contributions to workplace pensions, for those eligible (all employees aged 22 or over and earning over £10,000 per year are eligible), thanks to auto-enrolment.
This will mean an additional £86 going into pensions over the course of the year.
Currently, eligible employees working full-time on the NLW will have a total pension contribution of £798, which will increase to £884.
He continued: “While this may not seem a lot, with compound investment growth over many years even a small increase will prove very beneficial to future retirement savings, especially for those early in their careers.
“It also makes it even more valuable to remain in your employer’s workplace pension scheme.”
3 National Insurance rise
National Insurance Contributions (NICs) will increase by 1.25 percent for employees, employers and the self-employed, to provide extra funds to the NHS and for the state’s share of Social Care reforms currently being finalised by the Government. While a worthwhile cause, it will increase employers’ payroll costs and reduce employees’ take-home pay.
There had been calls for the Government to defer the increase, but instead the Chancellor announced a major increase to the lower threshold of earnings on which employees pay NI. This rises by £3,000 to £12,570 as of July 2022. This will be welcomed by many and will reduce the impact of the 1.25 percent increase, with lower earners being net gainers.
Mr Cameron added: “However, increasing the threshold has longer term consequences, as it will reduce the amount being collected in NI from today’s workers to pay for today’s state pensions.
“This could store up longer term challenges for the funding of state pensions.”
4 Income tax threshold freeze
Mr Cameron said: “Income tax personal allowance and the higher rate threshold will be frozen for four years from 2022/23 to 2025/26, rather than increasing in line with inflation as usual.
“As a result, due to inflationary increases in earnings, millions will find a larger proportion of their earnings subject to income tax.
“For example, an individual earning £30,000 last year and who receives a pay rise of the national average 4.8 percent will pay an additional £693 in income tax in the coming year.
“Additionally, many more people will find they become higher rate taxpayers even though their earnings may have failed to increase in line with inflation. Here, anyone earning over £48,000 last year who receives the national average earnings increase of 4.8 percent will pay higher rate tax on part of their earnings in the coming year.”
5 Pension lifetime allowance continues to be frozen
The pensions’ lifetime allowance will remain at £1,073,100, having been frozen last year. This means individuals will pay an extra tax charge if their pension pot grows to more than this amount.
The lifetime allowance of £1,073,100 may sound like a huge sum but it affects more people than individuals might think. For someone aged 65, it will buy an income of around £29,600 a year* increasing in line with inflation before tax. After basic rate tax, this equates to a monthly income of £2,180**.
Mr Cameron concluded: “Many of those affected by this change have simply been doing the right thing, saving regularly over many years, or have benefited from good investment growth in their defined contribution pension. In the current climate of rampant inflation, continuing to freeze the amount that can be saved into a pension without incurring a tax charge will have an adverse impact on an increasing number of people.”
*Retirement income at 65 is based on how much it currently costs to buy an annuity using the average of the top three annuity rates from the Money Advice Service annuity comparison tool on March 29, 2022. Income is paid monthly in advance and assumes the individual is in good health. We assume the income will increase in line with inflation.
** Based on basic rate tax of 20 percent, taking account of £12,570 personal allowance, leaving a taxable income of £17,030.