How to navigate the upcoming National Insurance and dividend tax rises

The tax rises grabbing the headlines are National Insurance (NI) and dividend tax. Both will rise by 1.25% from 6 April 2022.

The intention is to raise £36 billion over three years to help pay for NHS and social care improvements. Both are very worthy causes so you might not mind doing your bit to fund those vital services. But if the rises affect your personal plans in a big way, you might want to look to reduce the impact on your finances.

This article isn’t advice. Should you need personal financial planning advice, ask for financial advice. If you’re not sure of what to do to reduce your tax bill, speak to a tax specialist like an accountant. Remember that tax rules can change. They also affect everyone differently and the benefits depend on personal circumstances.

Make the most of your employer’s pension

NI is charged as a percentage of your gross earnings (before tax) and pension contributions can be made by reducing your gross salary via salary sacrifice. So, if you’re paying more into your workplace pension using salary sacrifice, your gross income is lower and in turn you pay less NI.

While this won’t mean you have more money in your pocket each pay cheque, it does at least mean your money is going towards your future rather than to HMRC.

Other pension contribution methods provide income tax relief but no National Insurance saving. So, contributing to a workplace pension via salary sacrifice looks more valuable than ever due to the National Insurance savings. Not all employers offer salary sacrifice though, so it’s worth checking if they do.

It’s also worth remembering that you can’t access your pension until you’re 55 (57 from 2028), so make sure you can afford to put more into your pension. Once it’s in, you can’t usually get it out before reaching the minimum pension age (without a big penalty).

Shelter your investments

With dividend tax rates also increasing by 1.25%, it’s more important than ever to make sure you’re holding your investments as tax efficiently as possible. Taxpayers are entitled to a tax-free dividend allowance of £2,000 each tax year.

Basic-rate taxpayers currently pay 7.5% on any dividends they get over the dividend allowance. From April 2022, this will rise to 8.75%. For higher-rate and additional-rate taxpayers, this will rise to 33.75% and 39.35% respectively. If you’re a Scottish taxpayer, the tax you pay on dividends is based on the tax bands for the rest of the UK.

This tax year, all UK resident adults are able to put £20,000 into an ISA. Investments held within an ISA are free of both UK income and capital gains tax.

If you have existing investments, you might wish to consider moving them into an ISA ahead of 6 April 2022 to start reducing the impact of the tax changes. You’ll have to sell then re-buy your investments, so you’ll need to think about capital gains tax if you go down this route. You have a £12,300 capital gains tax allowance available for this tax year (assuming it’s unused), but any gains above that threshold will be taxed.

Lifetime ISAs (LISAs): As part of your £20,000 overall ISA allowance, you can put up to £4,000 per tax year into a LISA and the government will top up whatever you put in the LISA by 25%. You can invest the money in your LISA and give it a better chance to grow over the long term. Remember though, all investments do go down as well as up in value, so you could get back less than you invest.

LISAs are best known for helping people get a deposit for their first home. But if you’re under 40 and you’re already a homeowner, you can still open a LISA and use it to compliment your pension. Remember though, using a LISA could mean you miss out on employer contributions.

Once the LISA is open, you can continue to contribute each year until you reach 50. Just be aware that if you take money out of your LISA before you’re 60, you’ll usually face a government withdrawal charge of 25%.

Find out more about LISAs

Organise your assets tax efficiently with your partner

Spouses and civil partners are able to transfer investments to each other without incurring capital gains tax at the point of transfer.

It’s important to check how much dividend income each spouse or partner earns each tax year outside of ISAs to make sure you’re making best use of your dividend allowances.

For example, let’s assume the following:

Remember, everyone has a £2,000 dividend allowance. So, in this scenario Sue could transfer some of her investments into Bob’s name so that both of their dividend income is within their £2,000 dividend allowances.

Getting expert help

Tax rules and allowances change, and it can be tough to keep up. The rules will also affect different people in different ways.

The way you use the rules and allowances will depend greatly on your financial objectives. It’s easy to get tangled up in the rules and ‘what ifs’ so it can help to get expert advice.

To get started with our financial advice service, book a call with our helpdesk to get more information about how advice could help you.

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