In 2022, many households face greater financial pressure as living costs rise. However, less well known is a set of “stealth taxes” that could erode your wealth without careful planning. Below, our team at WMM shares six of these to be aware of in the coming months – together with ideas to address them with your financial planner.
Five-year income tax freeze
Chancellor Rishi Sunak announced in the 2021 Spring Budget that income tax (together with others like capital gains tax and inheritance tax) will be frozen for four years from 2022/23 to 2025/26. Some projections suggest that this could, eventually, push 1.2m people into the 40% higher rate threshold as average UK wages steadily rise.
A range of options can be used to mitigate the impact on your finances. One idea might be to increase your pension contributions, as these receive tax relief at your highest income tax rate.
State Pension rise cap
In normal times (under the “triple lock” system), the State Pension rises each financial year in line with inflation, 2.5% or in line with the National Average Earnings Index (NAEI) – whichever is highest. However, after an 8.8% increase in earnings last year, this formula was suspended. Instead, the State Pension is set to rise by 3.1% in April. This is below the current 5.5% rate recorded by the Bank of England (BoE), and lower than the 7.25% rate projected in the spring.
Here, you may need to discuss your strategy with a financial planner. It might be that you need to lean more heavily on other income sources to fund your retirement in the short term (e.g. ISA savings). Alternatively, you may need to revisit your budget.
Child benefit loss
For parents with two children child benefit can be worth up to £2,000 per year. Once you or your partner starts earning over £50,000 per year, however, you may need to start paying some of this back (via a levy called the “High Income Child Benefit Tax Charge”).
This threshold has been frozen since 2013 and is set to continue as frozen in April 2022. This means about 1.6m families could lose their child benefit – including 120,000 families on the basic rate – as higher inflation and wage growth occurs across the country.
Again, this might mean revisiting your financial plan as a family, to prepare. For some, it might form another reason for a child-caring partner to return to full-time work (now that the children are older). Others may need to re-examine their budget.
Whatever you do, be careful not to simply avoid claiming child benefit (to avoid the hassle of repaying). Claiming can help you build up your State Pension via National Insurance credits.
Pensions lifetime allowance freeze
The lifetime allowance (LTA) is the maximum you can hold in your pension(s) before facing extra tax charges, and this has been frozen at £1,073,100 until April 2026. The annual allowance – which caps yearly pension contributions at £40,000 – will also remain frozen.
With inflation going up, many expected the LTA to rise to account for the rising cost of living. Yet the Chancellor has said he is pursuing this route as an alternative to raising income tax, VAT or National Insurance. This means that retirement savers need to be extra careful, planning so that they do not inadvertently breach the threshold.
Doctors and high-earning public sector workers, for instance, may be particularly at risk. Here, you can explore options such as “de-risking” your retirement portfolio strategy, if you still have some years ahead of you until retirement and you are nearing the LTA. Another idea is to make use of other tax-efficient investment vehicles, such as a Stocks & Shares ISA or a VCT.
Interested in finding out how we can optimise your financial plan and investment strategy? Get in touch today to arrange a free, no-commitment consultation with a member of our team here at WMM.
You can call us on 01869 331469
This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult us here at WMM (financial planning in Oxfordshire).