Rates are Rising
The pandemic has wrought havoc on the public finances as no other event in peacetime Britain has done. Borrowing such huge sums was absolutely necessary; however, repayment plans will now surely mean that the tax take will rise to levels not seen in over 50 years, starting with £40bn raised this year of which two thirds will be borne by business in the form of higher corporation tax and National Insurance.
From April 2022, National Insurance contributions (NICs) will increase by 1.25% for employed and self-employed people earning more than £9,658.
A similar increase will apply to employers’ National Insurance payments. Labelling this as the Health and Social Care Levy plays nicely into the “slightly warmer” feeling it engenders, in that voters will believe that they know where these funds are going – even if that is probably more illusory than real. It is far more palatable than increasing VAT or income tax – not that these might not also rise in future years.
National Insurance paid by employees has more than doubled from 5.75% in 1977 to 13.25% next year. At the same time, basic rate income tax has fallen from 34% to 20%. NICs are, however, only paid on hours worked, not on investment income (dividends/rents), and the rate reduces as earnings increase.
Sunak also announced a 1.25% increase in dividend tax above the current £2,000 annual exemption. (No increase for rental income received).
It is perhaps easy to highlight areas that have been hit hardest and give personal views as to the ways in which the inevitable increases should be shared; but our role as advisors is to understand current legislation and anticipate future legislation and offer relevant and personalised planning advice within these varying constraints.
For many years we have talked about pensions being an ideal vehicle that all should understand, and we recommend maximising contributions where appropriate.
ISAs, with their tax-free status, continue to play an increasing part, as do investments such as VCTs where tax-free income is still paid to holders regardless of personal tax rates. (VCTs are a specialist investment vehicle and certainly not appropriate for all clients due to their higher risk and illiquid nature; but in certain circumstances they can play an important role in overall client planning.)
As ever, we are available to discuss any aspect with you or with your friends and family seeking guidance in a world where the tax take seems likely to continue to increase.