Counting the cost of the frozen tax landscape

The cost of living squeeze looks likely to be further constricted from April as rising taxes bite. How can you plan for the effect?

The biggest change is to National Insurance contributions (NICs). From 6 April these will increase by 1.25 percentage points across the board. For employees the main rate of NI will increase from 12% to 13.25%.

The new rate will be applied on income between £9,880 and £50,270. Anything over this will be subject to a 3.25% NI charge. The government has also increased the self-employed main rate NI contributions, which go up to 10.25%.

These higher rates are intended first to boost funding for the NHS and then from 2023 to pay for social care costs, both under extra strain from the pandemic.

Dividend tax is also up by 1.25%, which will affect those running their own businesses, as well as investors.

The government has also frozen a number of tax thresholds, including the personal allowance, the higher and the additional rate bands. Over time, more people will be dragged into higher tax brackets as earnings rise.

Mitigating tax rises

You may not be able to avoid these taxes completely, but there are planning strategies to try. They are likely to be most effective if your current earnings are just below one of the main tax bands.

Employees can opt for salary sacrifice, where you agree to cut your salary, with the equivalent amount paid into your pension. There is no immediate cash saving, but you’ll be boosting your overall reward package (via pensions) rather than handing more to the taxman.

The value of tax reliefs depends on your individual circumstances and is subject to change. The Financial Conduct Authority does not regulate tax advice.

The value of your investment and any income from it can go down as well as up and you may not get back the full amount you invested.

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