The next 12 months will see yet more change for savers and investors, with dividends, National Insurance and the state pension all on the agenda for 2022.
AJ Bell’s experts take a look at ten things that will impact our finances in 2022 and what, if anything, people can do about them.
Personal finance changes – Laura Suter, head of personal finance at AJ Bell:
1) National Living Wage increases to £9.50 per hour for over 23s (and similar increase at other age levels) in April
Impact: Someone aged 23 or over on the minimum wage working a 37.5 hour week will see their weekly earnings increase from £334.13 to £356.25. Over the course of a year that could mean a pay rise of well over £1,000, from £17,374.76 to £18,525.
|23 and over||21 to 22||18 to 20||Under 18||Apprentice|
|April 2021 (current rate)||£8.91||£8.36||£6.56||£4.62||£4.30|
“The pay rise for everyone on the National Living wage will be hugely welcome at a time when both taxes and prices are rising. And it’s an inflation-beating increase too, with those 23 and over getting a near 7% increase, while those ages 21 and 22 get a near 10% increase – something no one would turn down at the moment. For someone working 37.5 hours a week it represents more than a £1,000 extra a year.
“However, the pesky National Insurance increase and stealth tax raises will eat some of this up, and an increase in living costs will eat a bit more up. But many of those on the minimum wage will still be better off as a result of the move.”
2) Energy price cap increases: some estimate it will increase by £400 or more. Announcement on the actual rate will come in February
Impact: The energy price cap in April is based on price increases happening at the moment, and as energy prices have leapt far higher there’s no doubt that households are in for another increase. Some estimate the rise will be around £400, which would take the average annual costs for someone on a default tariff from the current £1,277 to £1,677 – and it will be even higher for those on pre-payment meters.
“If you talk to anyone at the moment, rising heating bills are top of their concerns, amid a hike in prices across the board, and many will feel they can’t handle another rise in their energy bills – but that’s what’s coming down the line in April. Estimates vary wildly of how much the average homeowner will see prices rise by, from £150 up to £400 extra a year.
“The price cap rate will be announced in February, giving everyone a chance to prepare for the increase. But a big question-mark hangs over all this, as Ofgem, the regulator, is currently looking at reforming the price cap, with changes expected in time for April’s price increase. With a backdrop of failing energy firms and the price cap currently being out of line with rising wholesale energy costs, it seems unlikely any move will reduce the cost of energy for consumers.”
3) Council tax rates increase: Institute for Fiscal Studies estimates they will rise by 2.8%
Impact: The average Band D council tax set by local authorities in 2021/22 was £1,898. (Council Tax levels set by local authorities in England 2021 to 2022 (publishing.service.gov.uk)) A 2.8% increase implies a 2022/23 council tax bill of around £1,951.
“The Government’s reforms to social care leave local councils footing some of the bill, and this coupled with councils having to help more local people who hit tough financial times during the pandemic, mean it was inevitable that council tax bills would rise again.
“Households already saw an average increase of £7 a month this year, and the average Band D home looks set for a similar rise this year. However, the actual increase will vary dramatically around the country and many will face far higher increases. Anyone who is struggling to pay should seek help, as there is lots of support available for those on low incomes.”
4) Rail fares due to increase by 3.8% in January
Impact: Rail fares usually rise by July’s measure of RPI inflation, which was 3.8%. This is the highest RPI figure in July since 2011, when it clocked in at 5%, meaning commuters will face the largest rail fare hike for a decade. However, the Government has flexibility to set a different price increase, and it still hasn’t revealed its final plans for 2022.
Commuters already paying high costs on popular routes will face further hikes, for example if fares rose by 3.8%, the commute from Oxford to London including a London travelcard will now clock in at almost £6,700, rising by £245, while the annual commute from Tunbridge Wells to London, including travel card, will leap over the £6,000 mark, rising by more than £220 to £6,033. Meanwhile, the commute from Macclesfield to Manchester will rise by £84 to £2,284.
“Commuters may face an even larger hike in January if the Government decides to raise rail fares above inflation. In 2021 it increased fares by 1% above inflation to help cover Government money spent as a result of lost revenues in the rail industry during the pandemic. As the nation has been sent back to work from home and commuting never returned to normal this year, the same logic could be used to roll out another above-inflation hike next year – although it would take a bold Government to do so when the increase is already so high.
“Many commuters have had almost two years away from commuting five days a week and its eye-watering cost and will already be reluctant to return to it – and that’s before another hike in fares. But if you know you’ll need to buy a season ticket for next year, you can buy before the hike in January to keep costs down.”
5) Prepare for rising interest rates
Impact: The Bank of England is on a track to higher interest rates, but no one knows when exactly the Bank will pull the trigger and rates will be raised from their current record lows. This is the longest period ever that interest rates have remained unchanged, with rates having been at the current 0.1% for one year, eight months and 25 days*. Expectations are currently that Base Rate will hit 1% by the end of 2022.
“Any rate rise is good news for savers, who have suffered almost 13 years of the Base Rate being less than 1%, but when any rate rise happens savers won’t get an increase immediately. They will have to wait longer and often many won’t see any increase at all, unless they switch accounts. Ahead of any rate rise savers need to be wary of fixing their savings rates, as they’ll miss out on any increase when rates do rise.
“It’s the opposite case for mortgage holders, who should fix now while rates are still near record lows. Anyone on a variable rate deal will see their mortgage costs rise overnight when the Bank increases rates, so they should lock in at low rates. It’s the same story for anyone with debt, who should try to switch it to a lower rate now before any increase happens.”
*Data correct to 14/12/21
**Based on Refinitiv data
Tax and investments – Laith Khalaf, head of investment analysis at AJ Bell:
6) Dividend tax rate increases by 1.25 percentage points in April
- Basic rate taxpayers rise from 7.5% to 8.75%.
- Higher rate taxpayers rise from 32.5% to 33.75%.
- Additional rate taxpayers rise from 38.1% to 39.35%.
Impact: Take someone who owns their own company and pays their salary entirely in dividends. In 2022/23 they expect to pay themselves £50,000 in dividends.
The first £12,570 of income is within the personal allowance and so taxed at 0%. The next £2,000 of dividend income is tax-free via the dividend allowance. The remaining £35,430 falls within the basic-rate tax band.
If they had earned that much dividend income in 2021/22 they’d be taxed at 7.5%, leaving them with a £2,657.25 tax bill.
In 2022/23 they will be taxed at 8.75%, leaving them with a £3,100.13 tax bill.
“In the face of low interest rates, many savers have turned to the stock market to provide them with an income. Dividends are going to face even higher rates of income tax next year, so it’s even more pressing that investors shelter their dividend-paying shares in SIPPs and ISAs where they can.”
7) Frozen allowances
- Personal allowance at £12,570, and income tax thresholds frozen
- Pensions lifetime allowance at £1,073,100
- CGT allowance at £12,300
- ISA allowance at £20,000
- JISA at £9,000
- IHT threshold and Main-residence Nil-rate Band stay the same at £325,000 and £175,000
- Dividend allowance remains the same at £2,000
Impact: The examples below show estimates of what taxpayers might pay in extra taxes as a result of income thresholds being frozen, depending on their income. The figures are based on OBR expectations for inflation and average earnings increases. The figures show that those getting paid around the higher rate threshold (frozen at £50,270) get hit pretty hard, because inflationary increases in the threshold would ordinarily have offered some protection against paying higher rate tax.
|Income tax payable 2022/23 to 2026/27|
|Current income||Frozen thresholds||Inflation-linked thresholds||Additional tax|
Sources: AJ Bell, OBR
Assumptions: Wage growth and inflation rise according to OBR forecasts, income tax rates remain the same, individuals receive no additional income or income tax reliefs
“Freezing tax allowances, combined with inflationary pressure on wages, is going to produce fiscal drag on steroids. This is good news for the Chancellor, who can expect to pull in more money as salaries rise, but of course that is a direct transfer from workers’ pockets. No-one in their right mind is going to turn down a pay rise simply to avoid tax, but workers can reduce their tax bills with a bit of financial planning, in particular using pension contributions and spreading assets between spouses in order to mitigate higher taxation.”
8) Inflation may yet prove transitory
“UK inflation sits at 4.2% as measured by the Consumer Price Index, its highest reading in almost ten years, and almost everybody recognises things are going to get worse before they get better. A lot of the inflationary pressure in the system has come from energy prices, which have soared thanks to demand picking up globally in a synchronised manner, as the US, Europe and the UK all emerged from the depths of the pandemic at roughly the same time.
“There’s already some further pain in the pipeline on that score, because the Ofgem price cap on retail energy prices is expected to jump up again next April, pushing up the cost of the average gas bill by around £150. After a temporary reduction, VAT on hospitality will go back up to 20% at the same time, so that probably all adds up to inflation rising above 5% next spring, and household budgets coming under even more pressure.
“With prices rising so significantly above the 2% CPI target, one might think the Bank of England would be raising interest rates. So far there’s been talk, but little action, because the Bank has largely dismissed inflation as transitory. That view is beginning to wane, with two members of the rate setting committee breaking ranks and voting for a hike at the last meeting. Another interest rate decision is now looming, but the Omicron variant has poured cold water on expectations for any action. The markets are now pricing in a 75% chance of rates staying precisely where they are until February of next year.
“There will no doubt be some consternation about the Bank’s inactivity, but there is some method in the apparent madness. An interest rate rise would do little to alleviate current inflationary pressures, which are coming from a pick up in global demand, combined with disruption to supply chains as a result of the pandemic. Gradually, those two factors should moderate, and future contracts in both gas and shipping now point to declining prices in the longer term. Headline inflation is an annual figure, and in order to remain elevated it requires high prices not just to persist, but to continue to rise year on year. In twelve months’ time, it’s actually possible that the energy market will be applying downward pressure to inflation, because the comparison will be with a base of today’s heightened prices.
“There are those who think the strength of the labour market is another cause for concern when it comes to stoking inflation. Certainly the numbers look quite stark, with job vacancies at a record level, and wage growth on the up, as employers compete to get staff on their books. Part of this problem may be the labour market is just catching up with the rapid economic recovery, or there may well be frictional dislocations, as the jobs required by the post pandemic economy are different in type and location compared to those in demand before. The jury is really out on whether the strength of the labour market is cause for inflationary concern, because we are still at a relatively early stage of emerging from the pandemic. Waiting for labour market data that is not heavily distorted by the furlough scheme seems a sensible course of action for the rate setting committee to take.
“The Bank of England takes its fair share of stick for interest rate decisions, and that’s probably been exacerbated by the former governor Mark Carney’s unreliable boyfriend act, and the more recent comments by the current chief Andrew Bailey, that prompted markets to bet heavily on a November rate rise. However, the Bank’s analysis shouldn’t be dismissed lightly, given the resources and expertise they dedicate to forecasting inflation. That doesn’t mean we have to blindly accept their judgement that inflation is transitory, but we should give it proper weight.”
9) State pension increases by 3.1%, in line with September’s CPI inflation figure
- The ‘old’ basic state pension will rise by £4.25 per week, from £137.60 per week to £141.85 per week
- The ‘new’ flat-rate state pension will rise by £5.55 per week, from £179.60 per week to £185.15 per week
Impact: Had the earnings link been retained, pensioners would have enjoyed a bumper 8.3% boost in their incomes, pushing the full flat-rate state pension to £194.50 per week or £10,114 per year. Instead, the benefit will rise by £5.55 to £185.15 per week or £9,627.80 per year. In other words, the decision will ‘cost’ those in receipt of the full flat-rate state pension £486.20 in state pension income in 2022/23.
“The decision to scrap the earnings element of the state pension triple-lock in 2022/23 means retirees will ‘only’ enjoy a 3.1% rise in the benefit in April next year.
“Savers also face the risk of inflation climbing higher next year, meaning a 3.1% increase might actually feel like a cut in real terms.
“If, for example, inflation runs at 4% over the next 12 months, a 3.1% rise would represent a 0.9% drop once those rising prices are accounted for.
“If you think of someone receiving the full flat-rate state pension of £179.60 per week in 2021/22, if inflation runs at 4% the benefit would have needed to increase to £186.80 to retain its spending power.”
10) New social care tax increases National Insurance (NI) for employers and employees by 1.25 percentage points
- Employee NI rate will increase from 12% to 13.25% on earnings between the ‘primary’ income threshold (currently £9,568 per year) and the ‘upper’ income threshold (currently £50,270 per year), and from 2% to 3.25% on earnings above £50,270
- Employer NI rate will increase from 13.8% to 15.05% on employee earnings above the primary income threshold (currently £9,568 per year)
Impact: Take someone who is employed with total taxable earnings of £30,000. In 2021/22 they would pay NI at 12% on earnings between £9,568 and £30,000, leaving them with a total NI bill of £2,451.84.
In 2022/23 if the NI thresholds stay the same, but the NI rate increases to 13.25%, they will be left with a total NI bill of £2,707.24.
Some reports suggest the ‘primary threshold’ above which NI is due will increase from £9,568 to £9,880 in 2022/23. If this is the case, NI at 13.25% leaves them with a total NI bill of £2,665.90.
“Employees and employers will begin paying for Prime Minister Boris Johnson’s £12 billion per year health and social care reform plans through a 1.25 percentage point increase in National Insurance rates.
“The decision to hike NI rather than income tax was controversial, not least because pension incomes are not subject to NI – meaning older people who are more likely to benefit from the reforms in the short-term have largely been excluded from paying for them.
“For savvy savers, the NI hike makes pensions salary sacrifice more attractive, as contributions are taken from your earnings before employer and employee NI has been deducted.”