With a new year brings changes to the tax system, and other areas affecting our personal finances.
With inflation soaring, interest rates rising and the cost of living reaching extraordinary levels, it pays to keep an eye on all the big changes that might affect your wallet in 2022, but that you can plan and prepare for.
Here are changes you need to know about.
Income tax threshold freeze
The Government is set to freeze the income tax rate bands at their current levels.
As a result of this, more than 1.3 million people could be pulled into a higher tax band according to a study from the Institute of Fiscal Studies (IFS).
At the moment just 8.5% of workers’ pay the higher rate, but this could increase to 11% by tax year 2024-25 according to the IFS.
The personal allowance is currently £12,570, with anything between this and £50,270 taxed at the basic rate of 20%. The higher rate of income tax on anything above this is charged at 40%, up to £150,000. Finally, the additional rate is charged at 45% over £150,000.
So what does freezing these bands mean?
With inflation soaring it is likely you’ll be looking to earn more income to be able to keep up with the cost of living. But any pay rise you get could tip you into a higher band.
Plus, with any hikes to the bands now cancelled, you’ll miss out on the extra tax free cash from the personal allowance.
Other allowances are also frozen – the pensions lifetime allowance will stay at £1,073,100, the ISA allowance will stay at £20,000 and the inheritance tax threshold and nil-rate band will stay at £325,000 and £175,000 respectively.
National Insurance hike
Not content with holding back allowance rises, the Government has also decided to hike National Insurance (NI).
The new so-called Health and Social Care levy will raise an extra 1.25% in NI payments from anyone earning a salary, employers on their NI contributions, and on self-employed NI payments.
This means someone on a wage of £20,000 a year will pay an extra £130 in tax per annum. Someone on £50,000 a year will pay £505 more.
There is more too – the hike also affects dividends, meaning anyone taking an income from dividend payments will also see their tax bill increase by 1.25%.
Above an income of £2,000 the rate will be 8.75% for income within the basic rate band, 33.75% on the higher rate and 39.35% on the additional rate.
Energy prices
Already a big issue for many household budgets, energy prices have skyrocketed in recent months.
This led to a big hike in the price cap for energy bills, and this is likely to increase again, by up to £700 according to some estimates.
The current price cap is currently £1,277. While most analysts expect a rise of around £400, some think it could go as high as £2,000 depending on the state of the market by February.
The soaring prices have led to a swathe of energy firms going bust. If you’ve been affected by this, hold tight and wait for Ofgem to tell you which firm is taking over your supply, before attempting to change provider.
Unfortunately though, higher prices mean there is little price competition at the moment. If you want to save on energy bills, the best thing you can do right now is reduce your consumption, or make your property more energy efficient.
Loyalty penalty
New rules came into force for motor and home insurance customers on 1 January which mean anyone renewing their policy will not have to pay more than would be offered to a new customer.
These rules are designed to prevent the so-called ‘loyalty penalty’ – where a customer stays with the same insurer for years and sees their premium increase every time it comes to renew.
While those with policies to renew won’t see their prices increase, what is now likely is new policy prices will rise, and insurers could then offer higher prices to existing customers.
ISAs and pensions
Fortunately, this is one area where the Government has decided not to tinker with – for the moment at least.
Normal ISAs remained with a £20,000 annual allowance, while tax relief on pensions is still available with basic rate and higher rate relief.
This makes the two products still a great place to work to build wealth, and a great area to focus on for the year ahead.
If you would like to discuss any of the themes mentioned in this article, don’t hesitate to get in touch with your financial adviser.