2022 has already proven to be a challenging year for our finances. Cost of living, energy prices, fuel costs, interest rates, and inflation have all soared – and we're only a quarter of the way through the year. There's still a long way to go, and it doesn't look like it will get better just yet as some changes are coming.
Chancellor Rishi Sunak's announcement of the 2021 Autumn Budget was not met with applause. Increases in National Insurance contributions (NIC) rates and Dividend Tax left a sour taste in many individuals' mouths. Even with requests to call them off, some from the Chancellor's own party, the government is still following through with these changes.
There are also notable changes to Capital Gains Tax, Inheritance Tax, and the State Pension, which could significantly impact people's finances. With all the changes imminent, it is crucial to understand them to avoid some nasty surprises.
Therefore, this article will explore all the tax changes in the UK for 2022 and how they will impact individuals in all tax bands.
The UK government's Health & Social Care Levy, which comes into effect in April 2022, will see a National Insurance Contribution increase of 1.25% and a 1.25% Dividend Tax increase across the UK. This means that for someone on a £30,000 salary, it's estimated that a 1.25% increase in NIC will increase their contributions by £255.40, totalling just over £2,700 for the year.
Understandably, many people are unhappy about the increase in NICs. Still, the government has assured us that this increase is only for the 2022/23 tax year, returning to the 2021/22 rates in April 2023. And a NIC threshold increase in July 2022 is supposed to offset this for lower-income earners. Let's dive into the details below.
National Insurance rate and threshold changes
National Insurance will be increasing by 1.25% starting from 6 April 2022 for the 2022/23 tax year only. This increase will help produce more revenue for the NHS and social care, which has seen a hit throughout the last two years. Under the Health and Social Care Levy, the government aims to increase the number of working people who contribute to funding the NHS and the social care system.
This announcement was met with massive backlash from many people, including those within Rishi Sunak's party. Many critics claimed that the National Insurance increase would disproportionately affect low-income earners instead of high-income earners.
To offset this, the National Insurance threshold will rise to £12,570, making it the same as the Income Tax threshold. This alleviates some of the burden for lower-income earners and will mean NIC kicks in much later. Financial experts claim that the annual savings due to the increase in the National Insurance threshold could be as much as £330 per year. But, the new threshold will not take effect until July 2022 and will not affect high-earners whose threshold will stay at £50,270.
To visually break down these changes, below is a table that outlines the current National Insurance rates and thresholds compared to what they will look like in 2022/23 for both employed and self-employed workers.
Class 1 NICs - Employees
Employees paying Class 1 National Insurance Contributions will pay the following:
|Earnings Threshold (21/22)||Class 1 Rate (21/22)||Earnings Threshold (22/23)||Class 1 Rate (22/23)|
|Less than £9,568||0%||Less than £9,880*||0%|
|£9,568 - £50,270||12%||£9,880* - £50,270||13.25%|
|More than £50,270||2%||More than £50,270||3.25%|
* The National Insurance Contributions threshold increases to £12,570 from July 2022
Class 2 & Class 4 NICs - Self-Employed
Those self-employed will either pay Class 2 or Class 4 rates, depending on how much they earn. The changes will affect both classes and will mean they will pay the following:
|Profits threshold (21/22)||Class 2 and 4 rates (21/22)||Profits threshold (22/23)||Class 2 and 4 rates (22/23)|
|Less than £6,515||0%||Less than £6,725||0%|
|£6,515-£9,568||£3.05 per week (Class 2)||£6,725 - £9,880*||£3.15 per week (Class 2)|
|£9,568-£50,270||9% + £3.05 per week||£9,880* - £50,270||10.25% + £3.15 per week|
|More than £50,270||2% + £3.05 per week||More than £50,270||3.25% + £3.15 per week|
* The National Insurance contributions threshold increases to £12,570 from July 2022
Class 3 NICs - Voluntary
This NIC class is for those who want to pay National Insurance contributions voluntarily. This is more for expatriates or non-residents who, for instance, have gaps in their National Insurance record and don't want that to affect their eligibility to receive State Pension.
Class 3 NICs (2021/2022) - £15.40 per week
Class 3 NICs (2022/2023) - £15.85 per week
Dividend Tax changes
Like NIC, those earning from dividend income will also see a 1.25% increase in Dividend Tax rates starting from 6 April 2022.
The keen investors amongst us who earn money from owning shares in companies will be impacted by this, especially those who have an extensive portfolio and use dividends as their primary source of income. Of course, investments in a Stocks and Shares ISA are exempt from Dividend Tax.
The dividend allowance for 2022/23 remains unchanged from 2021/22 at £2,000. Earnings above this amount will be subject to Dividend Tax, and how much you get taxed will be dependent on which Income Tax band you are in:
|Income Tax band||Dividend Tax rate (2021/22)||Dividend Tax rate (2022/23)|
Our comprehensive Dividend Tax calculator will assist you in figuring out what your dividend tax bill will be.
Frozen tax rates and allowances
While there have been some changes to tax rates, thresholds, and allowances for the 2022/23 tax year, some have remained the same. Let's take a look at a few of these:
The Income Tax Personal Allowance, or in other words, how much you can earn before you have to start paying Income Tax, will remain unchanged for the upcoming 2022/23 tax year. The Income Tax thresholds have also remained unchanged. As such, the Income Tax brackets for 2022/23 are as follows:
|Income Tax Band||Threshold||Tax Rate|
|Personal Allowance||£0 - £12,570||0|
|Basic||£12,571 - £50,270||20%|
|Higher||£50,271 - £150,000||40%|
|Additional||£150,001 or above||45%|
Since April 2020, Corporation Tax has not increased from 19%. This was done to help companies and businesses stay alive during the pandemic. Fortunately for them, Corporation Tax will remain at 19% for the 2022/23 tax year.
However, Corporation Tax will see a jump up to 25% starting from April 2023 for non-ring fenced profits above £250,000. To ensure smaller businesses are protected and helped in the UK, smaller companies with earnings of £50,00 or less will pay a Small Profits Rate (SPR). Those that qualify for the SPR will pay Corporation Tax at 19%.
Pension Lifetime Allowance
The announcement in March 2021 that the Pension Lifetime Allowance was to remain at £1,073,100 for five fiscal years between 2021/22 to 2025/26 was not well received. Many were hoping to see a change to this in the Spring Statement 2022 announcement. However, these hopes were not met as no changes were made to the Pension Lifetime Allowance.
On the other hand, as confirmed in the Autumn Budget of 2021, State Pension will be increasing by 3.1% in April 2022, affecting both older basic State Pension and new State Pension. Those who reached State Pension age before April 2016 and are on the old basic State Pension, will receive £141.85 – a £4.25 increase up from £137.60. Those qualifying for the new State Pension will receive £185.15 – a £5.55 increase up from £179.60
Changes to reporting
This change already came into effect at the beginning of this year, but it's worth mentioning here. Starting from 1 January 2022, the rules about a deceased person's estate being classified as 'excepted' or not have changed.
An excepted estate is one where no Inheritance Tax has to be paid, which would be the case if any of the following criteria apply:
- Estate value is below the £350,000 Inheritance Tax threshold
- Estate is worth up to £650,000, and any unused threshold is being transferred from a spouse or civil partner who has died first.
- Estate is worth less than £3 million, and the deceased left the entire estate to a spouse, civil partner, or a qualifying charity.
- The deceased was living outside of the UK permanently at the time of death, and the total value of all their assets in the UK does not exceed £150,000.
With a 1.25% increase in National Insurance Contributions and Dividend Tax, a higher tax bill is expected in 2022. Although the government has promised to offset the NIC increase by extending the NIC threshold in July, many people are understandably displeased with having to part with more of their cash until then and how much tax they'll have to pay on dividends.
But, there is still some time to go in the year. With the UK government announcing a Spending Review on 27 October, alongside the annual Autumn Budget, we could potentially be facing further increases towards the end of the year.