Lowes Magazine Issue 120

TAX

Government policy and tax changes The Government introduced new legislation to ensure state pensions were uprated by 2.5% in recognition of their manifesto promise and commitment to pensioners. The Government said the triple lock would be re-instated in 2022. Increase in dividend tax

THE GOVERNMENT RECENTLY INTRODUCED THREE significant changes to national insurance contributions, State Pension calculation and dividend tax. One of the benefits of Independent Financial Advice is to create financial plans to help weather any adverse market events, changes to government policy or tax hikes and we would expect Lowes clients to be sufficiently protected in terms of their finances not to be overly affected by the changes. However, given the breadth of change, they are likely to affect all our clients in some way and are worth summarising here. National Insurance hike For working adults National Insurance (NI) contributions have been increased by 1.25%. This applies to employer contributions also. Billed by the Government as a new ‘Health and Social Care Levy’, the hike is intended to raise £12 billion a year over the next three years in an attempt to put money into the NHS post the pandemic and to pay for social care reforms. The tax increase will come into force in April 2022 and will be paid by all working adults. An important change to note from current NI arrangements, is that this will include those above state pension age who are exempt currently from National Insurance contributions. Reported figures show that those earning a base rate of £24,100 will pay an extra £180 over the course of a year, while those earning £67,100 will pay an additional £715 more a year. It is estimated that the highest earning 14% of people are expected to foot half the bill. Triple lock suspension The triple lock basis for the annual increase in State Pension payments has been suspended for a year. Under the triple lock the annual payment increase was set as the higher of earnings, price inflation or 2.5%. The earnings figure has been dropped for a year, moving instead to a double lock, based on price inflation or 2.5%. At time of writing, inflation is above 2.5%. If this remains the case, the state pension increase for 2022 will based on the inflation figure. Sticking rigidly to the State Pension triple lock formula would have granted state pensioners an unrealistic increase of around 8.8% at a time when earnings are still recovering from the pandemic. The triple lock had been tweaked in 2020 to ensure that pensioners received a fair deal, at a time when inflation was 0.5% and earnings were falling due to the furlough scheme.

The Government’s announced increase in the dividend tax rate by 1.25% will affect investors, and the shareholding company. Initial figures suggest the increase could raise as much as £600m a year. The planned increase will come into force in April 2022, for the 2022/23 tax year – see box for new tax rates. In an aim to start to equalize the tax positions of company directors and the employed, in 2018, the Government reduced the dividend allowance (the amount of dividends able to be received tax free) from £5,000 to £2,000, which increased the tax for those directors who were able to pay themselves low salaries (within the tax-free personal allowance) and higher dividends and therefore pay lower amounts of income tax overall. Looked at in more detail, the increases only really become costly for company shareholders and those with significant portfolios outside of ISAs and Pensions, where tax is not paid on dividends, and those receiving dividends over £2,000 allowance. The government suggests that of those people who receive income via dividends outside of ISA’s, 60% of them will not see a rise in taxation in April next year. With this hike, anyone needing an income from their investments should look to maximises their tax efficiency. This means, where possible, making use of all of the available allowances, including the £2,000 Dividend Allowance, the £12,570 Personal Allowance, £12,300 capital gains allowance, £20,000 ISA allowance, £40,000 Pension Annual Allowance and potentially the VCT Allowance. For those where dividends form a major part of their income, ultimately this hike will see them pay more tax.

New dividend tax rates from April 2021

Tax rate

Old rate

New rate

Basic Rate Higher Rate

7.5%

8.75% 33.75% 39.35%

32.5% 38.1%

Additional Rate

If this is an issue that effects you, please call us on 0191 281 8811.

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