The new calendar year can ignite a reenergised focus on new year resolutions and opportunities for the year ahead. Many are busy preparing accounts as self-assessment tax returns that fall due on 31st January and planning new budgets for the months to come. While a new calendar year may present a fresh start, it is also a good time to remind ourselves of any potential unused allowances and options available for 2021/22 as we are in the final quarter of the current tax year which will end April 5.
Some points to remember before the tax year ends:
Check your entitlement to marriage allowance
Marriage Allowance allows you to transfer £1,260 of your Personal Allowance to your husband, wife or civil partner. This will reduce their tax by up to £252. You can benefit providing you meet all of the following criteria:
- You’re married or in a civil partnership
- You do not pay income tax or your income is below your Personal Allowance (£12,570 for 2021/22)
- Your partner pays income tax at basic rate, which means their income is between £12,571 and £50,270 for 2021/22
Many people are still becoming aware of Marriage Allowance and the good news is that claims can be backdated to include any tax year since 5 April 2017. The maximum you can backdate is 4 years so not long left to claim for 2017/18.
ISA subscription allowance
The ISA subscription allowance is the total amount you can pay into an Individual Savings Account (ISA) in a single tax year. This limit is £20,000 for 2021/22. Investment within an ISA grows free from any income tax and capital gains tax, making them one of the most tax efficient saving vehicles in the UK. First-time buyers saving into a Lifetime ISA (LISA) can save up to £4,000 receiving a maximum bonus of £1,000. If you do not use the allowance it cannot be carried forward and limits reset in the new tax year on April 6th. Therefore, it is good practice to consider your saving objectives for 2022 now to avoid any potential missed opportunity within this arena.
Check your Child Benefit
If you or your partner earn over £50,000 you my have to pay back some of your Child Benefit in tax known as the High Income Child Benefit charge. You could lose all Child Benefit when you earn over £60,000. An increase in salary throughout the year could result in an unexpecting change in circumstance and bill to pay. If you find yourself in this situation prior to the end of the tax year you’ll be pleased to know there are ways to reduce your taxable income to avoid any charge. Because the ‘income’ used by HMRC is ‘adjusted net income’ any pension contributions made by an individual or gross contributions will reduce the final amount of adjusted net income.
Similar to ISA subscription limits, there are limits on pension contributions. The annual allowance (£40,000 for 2021/22) is the limit on the amount of contributions that can be made without incurring a tax charge. Unlike the ISA allowance, it is possible to carry forward any unused pension annual allowance from the previous 3 tax years. However, tax relief on pension contributions is restricted to the higher of £3,600 or 100% of your relevant UK earnings, subject to your individual annual allowance. Reviewing your pension saving objectives ahead of the end of the tax year can avoid any missed opportunity. As mentioned above pension contributions can reduce ‘adjusted net income’ which is useful to avoid Child Benefit charges and restore Personal Allowance for high earners above £100,000. For employers it is important to remember that pension contributions are deductible expenses against corporation tax and will need to be made within the relevant tax year.
What changes are coming in 2022 which could impact your finances
National Living Wage
Those on lowest legal rates will see a pay rise from 6th April 2022 with increases to National Living Wage. The current hourly rate of £8.91 is increasing to £9.50. Apprentices and workers at school leaving age will also see an increase.
Council Tax Rates
Council Tax rates are going up again this year as councils seek ways to raise revenues to aid the impact of social care reforms and the pandemic. We can expect a rise of at least 3% as Chancellor Rishi Sunak has announced. However, local authorities can add an additional 3% meaning some may see an increase of 6% from 2021 figures. Those on low incomes, claiming benefits and caring for others may be able to benefits from a reduction depending on your circumstances. You can contact your local authority for more information and apply directly.
In December, the Bank of England announced a rise in interest rates to 0.25% from a previous low of 0.1%. This base rate is used by banks and lenders to set their own rates for saving, loans, overdrafts, and credit cards. While savers might see a very small gain one of the bigger impacts will be to mortgage costs. If you are on a variable rate your payments will have seen a rise. If you have a fixed rate, it is worth checking when this is ending and start thinking about a new mortgage deal if applicable. With the current rate of inflation at 5.1% the Bank of England could decide to set further interest rate rises to help slow rising inflation. Difficult decisions to be made when the country is still concerned with how Omicron may damage the economy. The next meetings to decide on interest rates will be held on 3 February 2022 and 17 March 2022.
Tax Bands and Allowances for 2022
- Personal Allowance is £12,570, with Basic rate tax payable on income from £12,571 to £50,270, Higher rate tax payable on income from £50,571 to £150,000 and Additional rate tax on income above £150,000.
- Pension lifetime allowance remains at £1,073,100
- Capital Gains Tax allowance remains at £12,300
- ISA allowance remains of £20,000
- Junior ISA allowance remains at £9,000
- Pension annual allowance remains at £40,000
- Inheritance Tax (IHT) thresholds remain the same. £325,000 Nil Rate Band and £175,000 Residence Nil Rate Band
- Dividend allowance of £2,000 to remain
Dividend Tax Rates
Although dividend allowance remains at £2,000, tax rates will increase from 6th April 2022.
- Basic rate will see a rise from 7.5% to 8.75%
- Higher rate will see a rise from 32.5% to 33.75%
- Additional rate will see a rise from 38.1% to 39.35%
Corporation tax main rate remains at 19% for 2022. This will rise to 25% effective from 1 April 2023.
National Insurance Rate Rises
Employee rates will rise in 2022 from:
- 12% to 13.25% on earnings between £9,568 and £50,270;
- 2% to 3.25% on earnings above £50,270.
Employer rates will increase from 13.8% to 15.05%
Self-employed Class 4 rates will increase from:
- 9% to10.25% on profits between £9,569 and £50,270
- 2% to 3.25% on Profits above £50,270
- Pensioners will see a rise in 2022, however this will be less than previous adjustments given changes to triple lock.
- Old Basic State Pension will rise by £4.25 per week from £137.60 to £141.85.
- New State Pension will rise by £5.55 per week from £179.60 to £185.15.
Written by Alex O’Neill DipPFS, IFA at Beesure Ltd