Planning for a greater tax burden

planning for tax burden

In the recent Spring Statement, Chancellor Rishi Sunak announced “the biggest net cut to personal taxes in over 25 years”, directly responding to the cost-of-living crisis. In an attempt to relieve money pressures, Sunak will be increasing national insurance thresholds this year and reducing income tax to 19%, but this won’t come into effect until April 2024. So, in the meantime, what planning for the tax burden can you do and how can you combat escalating living costs? We look at the recent tax cuts, rises and the winners and losers following his announcements.

Tax cuts announced

To recap, the spring statement proposed that from July, the point people start paying National Insurance (NI) will rise from £9,570 to £12,570, which Sunak explained would result in an extra £330 a year for workers.

Also, in 2024, the basic rate income tax band will also reduce to 19% from the current 20% level.

The Treasury claim the two cuts combined are the biggest savings any government have announced since 1995. However, following on from the tax rises last year, are these announcements as good as they seem? And should we be planning for a tax burden instead?

Tax rises

Although the government intends to increase the NI threshold this year, let’s not forget that from April 2022, employees are paying 1.25p more per pound in National Insurance (NI). Along with the big tax freeze also announced last year, whereby the government stopped the inflationary increases to personal allowances and tax thresholds, the question is, are taxpayers any better off following the spring statement cuts?

Who’s bearing the biggest tax burden?

Those earning less than £25,000 will benefit from the recent tax changes. However, those earning above, specifically higher-rate taxpayers, will be hit hardest. Helen Miller, deputy director of the Institute for Fiscal Studies think tank, says that taking everything into account, by 2025-26 almost all workers will be paying more in tax.

According to the Resolution Foundation, middle-income households, will be £535 a year worse off, on average, while the richest 10% will average losses of over £2,000.

Higher rate taxpayer? Planning for the tax burden

If you’re a higher rate taxpayer, you probably haven’t benefited from the latest budget and spring statement. Although the National Insurance threshold has been increased to match income tax, high earners will have to pay high national insurance costs.

If you’re approaching the higher tax rate threshold of £50,570, you’re likely to feel the tax burden over the coming fiscal year ahead with the freeze on the tax allowances. And if you’re earning over £100,000, then there are few benefits unless you’re a business owner (see our business section below).

Here are a few steps to get your finances in order:

  • Check your savings strategy. If you’re coming to the end of a fixed-term on a savings account, savings rates have been creeping up recently, so there might be a better deal available for your cash. If you’re unsure about what to do with your savings, our financial planners can help.
  • Review your investment portfolio. Long-term strategies might be appropriate for your financial plan, but they should always be diversified. For example, investing in a diverse mix of asset classes such as stocks, bonds, and funds covering multiple industry sectors and countries could help spread your risk level. Before you change your investment strategy, speak to our team.
  • Assess your pension forecast and savings. Pension contributions are a tax-efficient way of saving for your future. Tax relief is added to contributions at your highest marginal rate of tax, subject to certain limits. So whilst the future tax cut from 20% to 19% might seem beneficial, it also means the government will pay less into your pension to top up your contributions. It, therefore, might be worthwhile considering making the most of your pension contributions between now and 2024 and benefitting from the additional tax relief whilst available. Don’t forget, the Lifetime Allowance, the maximum amount you can pay into your pension over your life, is frozen at its current level of £1,073,100 until 2026. It’s always worth speaking to a financial planner regarding pension savings, as there are lots of things to consider.
  • Create a spending budget. This doesn’t have to be onerous unless you’re a spreadsheet fan. Check your outgoings and make sure you have enough of a buffer to cope with rising bills. If you’ve never given much thought to your disposable income before, it’s wise to start keeping track of your spending, so you never run short.
  • Make a financial plan. If you haven’t already gone through a financial planning process, then now’s the time to do so. It will give you greater clarity on your current financial position, allowing for different scenarios and plans. In addition, a financial plan will give you more security and control of your hard-earned wealth.

In addition, the latest budget announcements included VAT relief on energy-saving materials such as heat pumps, insulation and solar panels. If you’re a homeowner planning to make green home improvements, there will be no VAT on these materials for the next five years. So, if you’re in a position to modify your home for sustainability reasons, now’s the time to see the true value of home improvements.

Business owner? Make use of these changes

If you own a small business, you might benefit from the £5,000 increase in the Employment Allowance. This offers tax relief to employers whose national insurance liabilities were less than £100,000 in the previous tax year, and you might be able to claim back for the previous 4 years. For more information, see the Employment Allowance page on the website.

The Chancellor also announced a reform of research and development tax credits (R&D) in terms of the generosity of these reliefs. So, if your business is planning to improve products, services, systems or processes, you might qualify for R&D tax credits. Usually, there needs to be an element of scientific or technological research and development, but this can include things like materials testing and new IT systems.

During the Spring Budget announcements, the Chancellor advised there would be greater scope to claim R&D tax relief. More announcements will be made in the Autumn Budget, along with notices on other forms of business investment that might help your company.

Overall, due to the rising costs of energy, food and other household bills, the months ahead are likely to tighten our spending. A little planning goes a long way, so whatever measures you can take to offset the current tax burden and cost-of-living crisis, the better shape your finances will be in the years ahead. Now’s the time to put solid plans in place.

If you would like a financial planning review, get in touch to speak to our financial planners.