5 Ways tax rises will affect you
BY Harvey Jones
27th Sep 2021 Managing your Money
The nation's wallets are under pressure like never before, as taxes rise, energy bills soar and benefits are cut. Here are five ways you could find yourself paying more
Energy prices are on fire
Home energy bills have soared this year, with regulator Ofgem increasing the energy price cap by £96 in April and another £139 in October, taking the average household’s bill to £1,277 a year. There is worse to come.
The price of natural gas has quadrupled in just a few months, and the price cap could rise by another £300 next April, according to the Centre for Economic and Business Research. That would lift the average bill to £1,600 a year.
Other bills are rising too, with the Bank of England predicting inflation will top some top 4%. Product shortages, labour shortages and higher energy costs will push up food bills.
Worryingly, that could force the Bank to increase interest rates, which would drive up mortgage costs, too.
Tip: Shopping around is harder ask than usual to find a cheaper energy deal as suppliers go bust, but still worth a go. Seek local authority and government grants to insulate your home.
"The price of natural gas has quadrupled in just a few months, and the price cap could rise by another £300 next April"
National Insurance is going up
From April 2022, around 25 million workers will hand over more of their earnings to HM Revenue & Customs, in the shape of higher National Insurance contributions.
Boris Johnson's 1.25% health and social care levy is designed to raise £12 billion a year to support the NHS and adult social care system. It will cost somebody earning £20,000 an extra £130 extra a year. A £30,000 earner will pay £255 extra, while those on £50,000 will pay £505 more a year.
Pensioners have traditionally escaped NI but now those who continue working beyond State Pension age will also pay the levy on their earnings.
Tip: Check if your employer has a salary sacrifice scheme. This can cut your NI bill and increase your pension contributions by an equivalent amount.
Tax allowances have been frozen
Chancellor Rishi Sunak has frozen the personal allowance, the point at which people start paying tax, at £12,570 for five years. The higher-rate allowance will also be frozen, at £50,270.
Some 1.3 million people will now pay income tax for the first time as a result, while a further one million will become higher-rate 40% taxpayers. Someone who gets a £1,000 pay rise that pushes them into the 40% tax bracket will hand over £200 more in income tax than under the old system.
If they get another £1,000 pay rise next year they will pay £400 more, and so on until 2026 and possibly beyond. This will cost taxpayers £8 billion a year more by 2025/26 if incomes rise with inflation, according to the Office for Budget Responsibility.
"The tax attack isn't over yet"
The pension lifetime savings limit has also been frozen, as have capital gains tax (CGT) and inheritance tax (IHT) allowances. Dividend tax has been increased.
The tax attack isn't over yet. Sunak is likely to come back to more to fund his COVID bailouts and plug the national deficit.
Tip: Use your tax allowances to the max, including the marriage allowance, £12,300 CGT allowance and your tax-free ISAs. If worried about IHT, reduce your exposure by gifting.
Benefits are being cut
From 6 October 2021, the government is set to cut the £20 universal credit and working tax credit COVID boost back to the basic £118 a week.
This will be a blow to many, including those who rely on universal credit to top up their earnings. After income tax, national insurance and the universal credit, some claimants only receive 37p for each £1 earned, according to the Resolution Foundation, pushing 800,000 into poverty.
Tip: Make sure you claim all eligible benefits, including housing costs, and support for caring responsibilities, and those with a sickness or disability.
Council tax
Council tax is also rocketing, with 83 councils in England and Wales increasing rates by more than the 5% cap recommended by the Government, according to Which?.
Annual bills for a band D home jumped by at least £50 in most areas as a result, while millions will pay more than £2,000 a year for the first time.
Tip: Single households qualify for a 25% discount, so claim if eligible. Pensioners who claim pension credit may also get support.
HOW WE CAN HELP
At Reader's Digest we have partnered with Unbiased for trustworthy expert guidance and advice on personal and business tax.
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