Are your personal finances up to scratch?
With inflation on the rise, the cost of just about everything on the increase and household budgets under their most pressure in years, it’s more vital than ever to make sure your hard-earned money is performing at its optimum.
The entrepreneur and author Omony Geoffrey Ocaya nailed it when he said: “You can't control the national and global economy. You can only control their impacts on your personal and family economy.”
The new tax year may be well underway, but many people leave their financial and tax planning until year-end. Don’t! Being ahead of the game puts you in a much more stable position for the short and the longer term. This guide will help you take full advantage of all the tax allowances available, so you don’t pay more than you need.
At the budget in March 2021, Chancellor Rishi Sunak started repairing the nation’s finances by freezing, until 2026, many tax allowances that would typically go up each year. Here is a reminder of the main tax exemptions and allowances, and what has – or hasn’t – changed for this year.
Income Tax and National Insurance
The amount of income you don’t have to pay tax on, known as the personal allowance, remains at £12,570. The basic rate of tax remains at 20% and the higher-rate tax threshold of 40%remains at £50,270. Both these thresholds are frozen until 2026. The additional-rate tax threshold of 45% is also unchanged at £150,000. One rate to see an increase is the National Insurance contributions (NICs), which are rising by 1.25% this tax year as a Health and Social Care Levy. Most employees will pay National Insurance at 13.25% and so including basic rate the total taken from salaries will rise toto 33.25%. However, the Chancellor has also raised the NIC threshold by £3,000 from July 2022, aligning it to the personal income tax allowance at £12,570.
Dividend and savings income
In 2022/23, through the Personal Savings Allowance, each tax bracket below can earn interest on their savings before paying tax at the following allowances:
• basic-rate taxpayers: £1,000 • higher-rate taxpayers: £500 • additional-rate taxpayers: zero
The dividend allowance also remains unchanged at £2,000 per annum. The government has increased Dividend Tax by 1.25%. This means that investors and company directors owning shares in their business will have to pay more on their earnings.
Tax rates on dividends above the allowances
Tax band 2021/2022 2022/2023 Basic 7.5% 8.75% Higher 32.5% 33.75% Additional 38.1% 39.35%
Both the freezing of allowances and the higher Dividend Tax underline the importance of seeking advice to help maximise the use of your tax allowances.
“Many people leave their financial and tax planning until year-end. Don’t! Being ahead of the game puts you in a much more stable position for the short and the longer term.”
Personal pensions
Pension allowances have been left unchanged for this tax year. Most individuals can get tax relief on pension contributions up to £40,000 a tax year, or 100% of relevant UK earnings, if less. That annual allowance continues to taper down for individuals with an adjusted income above £240,000 and threshold income over £200,000. The minimum reduced annual allowance this year is £4,000. The lifetime allowance – the most you are allowed in your pension pot before triggering an extra tax charge – usually moves up in line with inflation. However, it stays at £1,073,100 for 2022/23 and will stay frozen until 2026, and could affect many people, even middle earners, over their lifetime. This makes it even more important to use allowances such as ISAs, in addition to pensions, where possible. For many, it will make financial advice and planning more important too.
ISAs
The ISA allowance remains at £20,000 for 2022/23, including for Stocks & Shares ISAs and Cash ISAs. What also remains are the very-low rates of interest available on Cash ISAs. Though stock-market volatility can be off-putting, investing in shares is likely to remain the best long-term option for ISA savers, especially when inflation is the highest it has been for many years
Junior ISAs
Junior ISA annual allowances also remain unchanged at £9,000 per annum. Alongside children’s pensions, Junior ISAs are a great opportunity to help give children a financial head start. Parents should reconsider any cash positions currently, given current ultra-low interest rates, especially if there is a long-time horizon until the child turns 18 and can access the funds.
Inheritance Tax
The Inheritance Tax (IHT) nil-rate threshold for 2022/23 remains at £325,000 and this has also been frozen until 2026. The additional residence nil-rate band, where residences pass to direct descendants, stays at £175,000.
Capital Gains Tax
The annual Capital Gains Tax (CGT) exempt amount for individuals remains at £12,300 until 2026. The government is now not proceeding with some expected reforms to IHT and CGT, which brings more certainty to planning - now may be a good time to take advantage of CGT allowances and IHT planning before the government changes its mind!
Corporation tax
The main Corporation Tax rate will remain at 19% for the year 2022/23. For businesses with profits of £250,000 and over, the rate will rise to 25% from April 2023. The rate for businesses with £50,000 profit or less will stay at 19%, and there will be a marginal taper for those with profits between £50,000 and £250,000.
In Conclusion
There’s a lot to consider, so don’t hesitate to get in touch with your advisor to ensure you make the most of your allowances. The value of an investment will link directly to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested. An investment in a stocks and shares ISA will not provide the same security of capital associated with a Cash ISA or a deposit with a bank or building society. The bases, levels and reliefs from taxation can change at any time and depend on individual circumstances.
Clarence Place Wealth Management Ltd represents only St. James’s Place Wealth Management plc (which is authorised and regulated by the Financial Conduct Authority) for the purpose of advising solely on the Group’s wealth management products and services, more details of which are set out on the Groups’ website at www.sjp.co.uk/products.