The new tax year starts this week and for many, that means people being worse off. Spiralling energy prices and rising inflation are foremost in the minds of many householders. But changes in the tax system that come into play this week, and some bill increases that have received less attention in the press, are also set to cause a headache.
National insurance and dividend tax
From Wednesday, the controversial rise in national insurance contributions (NICs) will come into effect. Announced last year, the government says the increase is to fund social care and the NHS.
Under the changes, both the employed and self-employed will pay 1.25p more in the pound. Employees will be charged 13.25% on earnings between £9,568 and £50,270 and 3.25% on income above that. For the self-employed, class 4 contributions will rise to 10.25% and 3.25%.
However, there is some respite to come in July, when the threshold at which NICs start to be paid will rise from £9,880 to £12,570. Accountancy firm Blick Rothenberg says those earning up to £41,389 will be better off than they were in the last tax year, but their pay will dip before then with the new regime.
Once your income exceeds that figure, you will still be worse off than in the 2021/22 tax year.
For an employed worker earning £50,000, the effect of the two changes will be a decrease in take-home pay of about £200 a year.
Tax on share dividends will also increase by 1.25 percentage points, which will particularly affect people who rely on dividends as part of their income.
Investors can earn up to £2,000 before they are liable for tax. After that, basic-rate taxpayers will pay 8.75%, while for those on a higher rate it will be 33.75%. A basic-rate taxpayer who receives £10,000 in share dividends will pay £700 in tax, up from £600.
Income tax allowances
In last year’s budget, chancellor Rishi Sunak announced that the personal allowance threshold would remain unchanged until 2026, instead of rising in line with inflation.
This means the tax-free personal allowance remains at £12,570 for this year; above that threshold 20% income tax kicks in. The threshold for higher-rate income tax in England, Wales and Northern Ireland – when workers start paying 40% – has been frozen at £50,270.
The effect will be to bring millions more workers into the tax net. As employees get pay rises, they will be pushed over the thresholds. If your employer has given you a rise to help you keep up with inflation, you might find less of it ends up in your pocket than expected.
Steven Cameron, pensions director at Aegon says: “An individual earning £30,000 last year, who receives a pay rise of the national average 4.8%, will pay an additional £693 income tax in the coming year.”
Water bill increase
While many people will be focused on the increased cost of their energy, most households will also see a rise in water charges. Overall, bills have gone up 1.7% in England and Wales, pushing up the typical bill by £7 to £419, according to Water UK, the industry body.
National Energy Action, a charity which works to eradicate fuel poverty, says there are wide regional differences.
In the south-east, customers will potentially see reductions in their bill by 6.2%, but those in the north-east of England may see increases of 10.8%.
Jess Cook, of National Energy Action, says the charity expects to see a significant increase in the number of people defaulting on their bills as they struggle with the rising cost of living.
In many instances, the water bill is the first to go unpaid, she says: “This should be recognised for what it is – the first sign of substantial difficulty – and support should be available to households at this point to stop them spiralling into debt.”
All water companies offer a social tariff, or a reduced bill, to customers experiencing financial difficulty.
The WaterSure scheme, meanwhile, helps people who use a lot of water for medical needs and are on benefits, with their bills.
Councils around the country have raised bills, with the average Band D demand going up by 3.5% to £1,966 a year – a £68 increase on last year, according to figures from the Department for Levelling Up, Housing and Communities.
The most expensive band D council tax is in Rutland in the East Midlands, where residents pay £2,300, followed by Nottingham, Dorset, and Lewes and Wealden in East Sussex. The lowest band D rate is in Westminster, where bills are £866 a year.
Consumer campaigner Martin Lewis has called for homeowners to ensure that they are in the right tax band, and to challenge it via the Gov.uk website, or through the Valuation Office Agency.
Council tax payers in England in bands A to D will receive a rebate of £150 on their bills this month, which will not have to be paid back, as part of the government’s plan to ease the pressure during this period of rising costs. The money will be paid straight into the bank accounts of those who have a direct debit set up with their local council, but anyone paying by other means will need to make a claim.
And watch out for …
The long-term decline in the number of people sending letters, coupled with the rise in inflation, means the price of stamps is increasing from Monday. A first-class stamp will go up 10p to 95p, while second-class will go up 2p to 68p.
Meanwhile anyone hoping to fly long-distance after the pandemic restrictions will see the effect of rises in air passenger duty, a tax on passenger flights from UK airports. The rate for long-haul economy flights will go up by £2, while premium economy and higher will increase by £5 from Wednesday.