The new financial year has now started which means there are a few key changes happening everyone should be aware of, including workers and people who have reached retirement age.
The cost of living crisis is set to put the financial squeeze on millions of households across the country as Ofgem’s 54 per cent energy price hike is now in effect, forcing many people to make drastic cuts to their spending and outgoings.
Steven Cameron, Pensions Director at Aegon, explains other changes that could have an impact on your personal finances between now and the end of this tax year on April 5, 2023.
Key changes to be aware of this year
- State Pension 3.1% increase
- National Minimum Wage increase
- National Insurance 1.25% rise
- Income tax threshold freeze
- Pension lifetime allowance continues to be frozen
State pension increases by 3.1%
The State Pension under the ‘triple lock’ is increased each year by the highest of earnings growth, inflation or 2.5%.
For 2022/23, the UK Government has removed the earnings component to avoid distortions created by the pandemic and furlough.
Steve explained: “As a result, this year the State Pension will rise by 3.1%. This is only half the current inflation rate of 6.2% and could leave those heavily reliant on the state pension, and already struggling with rising prices, severely stretched.
“However, the Bank of England’s latest prediction that inflation might reach 8% or more later in the year could mean that we see a bumper increase to the State Pension in April 2023, thanks to the reinstating of the triple lock – now confirmed by both the Work and Pensions Secretary and the Chancellor. While not easing current pressures, it could at least make up for the below inflation increase this year.”
Minimum wage increase offers pensions benefit
The National Living Wage (NLW) has now increased by 6.6% from £8.91 to £9.50 an hour. Not only is this good news for income, but it also brings with it increased contributions to workplace pensions, for those eligible, thanks to auto-enrolment.
Steve said: “This will mean an additional £86 going into pensions over the course of the year. Currently, eligible employees working full-time on the NLW will have a total pension contribution of £798, which will increase to £884.
“While this may not seem a lot, with compound investment growth over many years even a small increase will prove very beneficial to future retirement savings, especially for those early in their careers. It also makes it even more valuable to remain in your employer’s workplace pension scheme.”
National Insurance rise
National Insurance Contributions have now increased by 1.25% for employees, employers and the self-employed, to provide extra funds to the NHS and for the state’s share of Social Care reforms currently being finalised by the UK Government.
While a worthwhile cause, it will increase employers’ payroll costs and reduce employees’ take-home pay.
Steve said: “There had been calls for the UK Government to defer the increase, but instead the Chancellor announced a major increase to the lower threshold of earnings on which employees pay NI.
“This rises by £3,000 to £12,570 as of July 6, 2022. This will be welcomed by many and will reduce the impact of the 1.25% increase, with lower earners being net gainers.
“However, increasing the threshold has longer term consequences, as it will reduce the amount being collected in NI from today’s workers to pay for today’s State Pensions. This could store up longer term challenges for the funding of state pensions.”
Income tax threshold freeze
Income tax personal allowance and the higher rate threshold will be frozen for four years from 2022/23 to 2025/26, rather than increasing in line with inflation as usual.
Steve explained: “As a result, due to inflationary increases in earnings, millions will find a larger proportion of their earnings subject to income tax. For example, an individual earning £30,000 last year and who receives a pay rise of the national average 4.8% will pay an additional £693 in income tax in the coming year.
“Additionally, many more people will find they become higher rate taxpayers even though their earnings may have failed to increase in line with inflation. Here, anyone earning over £48,000 last year who receives the national average earnings increase of 4.8% will pay higher rate tax on part of their earnings in the coming year.”
Pension lifetime allowance continues to be frozen
The pensions lifetime allowance will remain at £1,073,100, having been frozen last year.
This means individuals will pay an extra tax charge if their pension pot grows to more than this amount.
Steve commented: “The lifetime allowance of £1,073,100 may sound like a huge sum, but it affects more people than you might think. For someone aged 65, it will buy an income of around £29,600 a year increasing in line with inflation before tax, after basic rate tax, this equates to a monthly income of £2,180.
“Many of those affected by this change have simply been doing the right thing, saving regularly over many years, or have benefited from good investment growth in their defined contribution pension.”
He added: “In the current climate of rampant inflation, continuing to freeze the amount that can be saved into a pension without incurring a tax charge will have an adverse impact on an increasing number of people.”