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In recent years, many older people have struggled with the financial burden of paying for their social care. That’s why, in September, the government announced plans to address this issue.
As well as introducing a cap on the potential costs, the prime minister also stated that there would be a tax rise to pay for this restructuring. While these changes will be able to make a positive impact on the lifestyles of many older people, you may be wondering how the change could affect you.
From 2022, National Insurance contributions (NICs) and Dividend Tax are set to rise, so read on to find out more about how they could affect your wealth.
The government is raising taxes to finance significant restructuring in social care
In a speech in September, the prime minister announced his plans to increase both NICs and Dividend Tax, starting in April 2022. Although he pledged not to increase taxes in his 2019 election manifesto, his reasons for doing so were twofold.
Firstly, in recent years the cost of later-life care has become a significant financial burden for many older people and the government is hoping to ease this problem. Their planned tax increases are hoped to raise an extra £12 billion, which can be used to tackle this crisis.
Secondly, part of the money is also going to be set aside to help the NHS to recover from the strain of the coronavirus pandemic. According to the Guardian, the healthcare system is set to receive £5.3 billion out of the total £36 billion that the tax hike will raise over the next three years.
Due to these changes, as of April 2022, the NICs of both employers and employees will rise by 1.25 percentage points. Then, from April 2023, this extra amount will be collected as part of the government’s new Health and Social Care Levy.
The rise in National Insurance contributions will affect business owners the most
The most obvious way that the rise in NICs will affect you is that it will eat into your wealth by a greater amount. According to government figures, published in MoneySavingExpert, a higher-rate taxpayer who earns the median higher-rate taxpayer’s income of £67,100 a year would see their annual contributions rise by £715.
However, the change will especially affect you if you’re a business owner, as it could significantly eat into your profits. As you can see from the table below, both employers and employees have to pay Class 1 contributions, which are based on how much an employee earns.
This rate is 13.8% for employers and 12% for employees, up to the cap of £50,000 a year. Anything above this threshold is taxed at a rate of 2%.
Source: Money Saving Expert
According to industry figures from the Federation of Small Businesses, the tax rise could cost business owners around £5.7 billion.
If you take a portion of your salary in dividends, you may have a higher tax bill
The government’s proposed tax rises could also affect you if you choose to take a portion of your salary through dividends. While this can often be a sensible financial decision, you may be affected by the change to Dividend Tax that is set to happen from April 2022.
If you earn more than £2,000 a year from company dividends then you could face a higher tax bill, regardless of your income band.
Source: Money Saving Expert
For example, let’s say you pay the higher-rate band of tax and take £10,000 in dividend payments each year. With the Dividend Allowance standing at £2,000, this means you have to pay 33.75% tax on the £8,000 above this this threshold.
This would result in a tax bill of £2,700, which is £100 more than what you would have to pay in the 2021/22 tax year.
Working with a planner can give you more confidence that you’ll reach your financial goals
While the money raised will be used for a good cause, the announcement of tax rises might alarm you. After all, it’s easy to worry about the overall impact that they could have on your long-term goals.
Working with a financial planner can help you to manage your wealth to minimise the impact that the changes could have on it. This can give you a greater degree of confidence that tax changes won’t affect your plans.
Whatever the future may bring, receiving professional advice can help to give you greater peace of mind to know that your progress towards your financial goals won’t be affected.
Get in touch
If you want to know more about how the potential government tax rises could affect you, get in touch. Please email enquiries@metiswealth.co.uk or call 0345 450 5670.
Please note
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
