New taxes are coming help!
Our personal finance expert is here to answer your questions on everything from loans to liquidity
QI have been reading about all the new taxes that are being levied to pay for social care and the NHS. I am eight years from retirement and still working full time. I have a small workplace pension and some investments which I will sell to fund my retirement, but money is going to be tight and these new taxes will make things worse. Is there anything I can do to minimise the effect of these new taxes on my retirement plans?
ANEWS OF the tax increases have sent shock waves across the country. But the last 18 months have left the NHS on its knees and brought into stark relief the problems with the current social care system. To try and fix them, Prime Minister Boris Johnson has decided to introduce an extra levy of 1.2 percent on National Insurance contributions and dividends tax starting from April 2022 - April 2023 for those working past the state pension age.
Currently you can earn £2,000 tax free from your dividends before tax is payable. Above this, basic rate taxpayers are charged 7.5percent, higher-rate taxpayers 32.5percent and additional-rate taxpayers 38.1 percent.
Remember though the £2,000 is in addition to your personal allowance of £12,570 in the current 2021/22 tax year. So if you earned £14,000 in dividends for example, provided this was your only source of income you would avoid paying tax altogether.
Unfortunately thereafter there is not a lot of wriggle room to avoid the extra tax. However there are some things you can do. First is to take full advantage of both your Isa and pension allowances. These allow you to save your money via a tax free wrapper and once invested this way all dividends are paid tax free.
Everyone has an Isa allowance of currently £20,000 — £9,000 for a Junior Isa— in which investments grow tax free and no income or capital gains tax is payable when the money is taken out. If you have money invested out-side an Isa, and have not used up your allowance for the year, then it it probably worth selling and re-buying the investment within an Isa wrapper — known as ‘bed and Isa’. Everyone has a capital gain tax allowance of currently £12,300, so you are unlikely to have to pay tax on any profit you make if you do this.
It is also important you maximise your pension contributions each year. Typically all but the highest earners can pay up to £40,000 into a pension each year and receive tax relief. The money saved in the pot then grows free of dividend tax.
Finally you could see if your employer offers a salary sacrifice scheme, whereby you exchange part of your salary for a non cash benefit. This is most commonly pension payments, but can also include schemes such as bike to work or gym membership. This has the effect of reducing the NI both you and your employer pay. The downside however is you reduce your ‘salary’ which could in turn reduce, for example, any salarylinked life insurance or the size of any mortgage you apply for.