2022 Financial Changes – What You Need to Know

As the new tax year begins on April 6th, we take a look at the many financial changes which come into play this year and next, as a result of the 2021 Autumn Budget, 2022 Spring Statement and global developments.

Published: 4th April 2022
 
Rishi Sunak delivers the Budget

Photo:  Chancellor Rishi Sunak delivers the budget BBC News

 
Chancellor Rishi Sunak’s 2021 Autumn Budget outlined plans for the country’s post-pandemic economic recovery, including changes to taxes and benefits, which come into effect this April. Most taxpayers will see their tax bills increase, as the Government finds ways of recouping the billions spent on the Covid-rescue package. Unfortunately, this coincides with spiralling energy bills and the rising cost of living, which means this year is going to be tough financially, for many people.
Piggy - repay student loan 

Key Points at a Glance

 
Inflation – highest level for 30 years fuelled by energy prices, the pandemic fallout, Brexit and and now the war in Ukraine. Fare increases and the removal of energy price caps will add to the cost of living.

Interest rates – the Bank of England has raised interest rates to curb inflation, but this also increases the cost of borrowing e.g. credit, overdrafts, loans and some mortgages.

Tax – big changes to National Insurance Contributions (NICs), with raised thresholds lessening the impact of higher rates. But overall, the increases to NICs and council tax, alongside frozen allowances, will mean higher tax bills for many people over the next few years.

Fuel duty – rates cut by 5p/litre for one year.

Low Earners – minimum wages raised. Benefits go up, but do not match the increased cost of living.
 
 

The UK Economy

 
This explains some key factors relating to the economic backdrop, to help explain the Government measures.
 

Economic growth

After declining 9.4% in 2020, the UK economy exceeded its pre-pandemic size for the first time in November 2021. However, the emergence of Omicron has slowed economic recovery this year, and the invasion of Ukraine has added an unexpected burden. GDP is predicted to grow by 3.8% in 2022.
 
 

 

What is GDP?

GDP (Gross Domestic Product) is one of the key indicators used to gauge the health of the economy.
It is often referred to as the ‘size’ of the economy, and represents the total value of goods and services produced by all sectors (agriculture, manufacturing, construction, energy, services and government).
 
As important as the figure itself is the trend; the UK measures GDP quarterly.
If GDP is rising, it means that incomes are rising and consumers are purchasing more, which signifies a stronger, growing economy.
A decrease in GDP shows the economy is contracting; and two consecutive quarterly decreases mean the economy is in recession.
 
Q&A: What is GDP? – BBC News
 

 

Inflation

Inflation has hit a 30 year high at 6.2% (February 2022).  The Office for Budget Responsibility (OBR) forecasts that inflation will average 7.4% this year, and that this will lead to the worst fall in living standards since records began in 1950.
 
Several factors have been driving up the cost of living, including soaring energy prices and the rising cost of food and clothes. The pandemic fallout, Brexit and now the war in Ukraine have combined to disrupt global supply chains, pushing up the costs of raw materials and imports generally. Staff shortages have also led to rising prices in certain sectors such as hospitality (as will the planned return to 20% VAT).

 

 

Inflation

Inflation is the rate of increase in prices of goods and services over a given period of time.
It is measured by the Office for National Statistics (ONS), which tracks the prices of hundreds of everyday items. Two commonly quoted measures of inflation are:
The Retail Prices Index (RPI) which takes account of mortgage payments in its ‘basket of goods’.
The Consumer Prices Index (CPI) which excludes housing costs and tends to be a lower figure than RPI.
 

 
As salaries and wages have not kept pace with inflation, this is effectively like taking a pay cut. Even savings will be worth less, unless the interest rate is higher than inflation (but that sort of rate is hard to find at the moment).

 
 

Key Financial Developments

 

Interest Rates Go Up

 
The Bank of England raised interest rates from 0.5% to 0.75% in March 2022 and further increases are expected later in the year.

 

Why was this action taken?

When prices are rising faster than wages (as in the current scenario), then the Government may raise interest rates to control inflation. Higher interest rates mean the cost of borrowing goes up. It also means you earn higher returns from savings. So, consumers will be encouraged to save more and spend less. With less disposable income being spent, the economy slows and the rate of inflation then decreases.

 

How will a rise in interest rates affect you?

Borrowers: For any type of borrowing that charges a variable interest rate, the cost of repayments will go up e.g. credit cards, overdrafts, personal loans and many mortgages.

Student loans: The interest rate has gone up to 4.5%, reflecting the increase in inflation. However, it’s important to remember that a rise in interest will not affect how much you pay back each year, because repayments are based on your earnings. See here for more information on student loans.

Renters: Rents are likely to be increased as landlords pass on the higher cost of borrowing to tenants.

Savers: You should earn slightly higher returns from your savings accounts.

 
 

Tax Changes

 

Basic rate tax cut (in 2024)

The Chancellor announced that the basic rate of income tax would be cut by 1% from 20% to 19%; but this won’t take effect until April 2024, owing to the current uncertainty in the economy. So, it does little to ease the cost-of-living crisis that people are facing today.

For someone earning £25,000 a year, the tax cut would save them around £125.

There are no current plans to change tax rates in Scotland.

 

Frozen tax allowances

In most parts of the UK, there are no immediate changes to income tax. The threshold before you start paying 20% basic rate income tax is called the Personal Allowance. This remains at £12,570 at least until 2026.  Similarly, the starting point for higher rate income tax 40% remains frozen at £50,270.
 
However, in Scotland, the government has proposed raising some of the thresholds, which will allow people to earn more before they pay a higher rate of tax. See here for details.
 
What does this mean?
The implication of frozen thresholds and allowances is that over time, because of rises in wages and house prices, more people will pay more tax, as they move above tax-free allowances or into higher tax bands.
Here are some of the frozen allowances that may be significant for you:

  • Personal Allowance at £12,570 and income tax thresholds frozen until 2026
  • Savings allowance for basic rate taxpayers: £1000
  • Tax-free ISA cash and shares combined allowance: £20,000
  • Dividend allowance for basic rate taxpayers: £2,000
  • Capital Gains Tax annual exempt amount: £12,300 until 2026
  • For homebuyers, the stamp duty holiday ended in September, with the tax-free threshold returning to £125,000. For full details see here.

Find out more about tax rates and bands here.

 

National Insurance shake up

1.25% increase in NI contributions, but threshold goes up too.
 
One of the more controversial changes is the rise in National Insurance Contributions (NICs) this April, to help fund health and social care.
 
From April, the threshold for NICs is £9,880 for employed workers and £6,725 for self-employed, which means that you don’t pay NICs on anything you earn below that level. Employees and the self-employed will then pay an additional 1.25p in NICs for every £1 they earn above the threshold.  With NICs now at 13.25%, a basic rate (20%) taxpayer will pay 33.25% of their wages in taxes.
Effective 6th April 2022
 
In view of the cost-of-living crisis, it was hoped that  the Chancellor would cancel this tax increase. Instead, in a move to counter the impact, from July he will raise the threshold at which workers start to pay National Insurance: for employees, the threshold goes up by £3000, to £12,570, which brings it in line with the Personal Allowance for income tax. For the self-employed, they pay NICs on profits above £11,908 for the 2022-23 tax year.
Effective 6 July 2022
 
The Government estimates that the changes to NICS mean about 70% of workers will pay less overall from July. People with income or profits under £35,000 a year will save money, but those earning more will face higher bills. Here are examples of the NIC changes for various salary levels:

£20,000 -£178
£30,000 -£53
£40,000 +£71
£50,000 +£196

 

Dividend tax rises

If you own shares in a company, you will pay more tax on the dividends you receive. As with National Insurance, the tax rate will rise by 1.25%.
 
You are only charged tax on the amount you earn above the tax-free dividend allowance of £2,000, and you pay nothing on earnings from tax-free investments such as stocks and shares ISAs. Also, if you own your own company and pay yourself in dividends, any income that falls within your Personal Allowance does not incur tax.

 

Council tax rates up

Although it will vary across the country, the average household could see council tax bills go up by 6% this year, as local authorities try to raise cash to cover the costs of the pandemic and social care.

 

Changes to alcohol duty

The system will be simplified so that drinks are taxed according to their alcohol content, not their category. This means some lower alcohol drinks will become cheaper e.g. draught beer, cider and sparkling wine. The aim is to help the UK become healthier by reducing consumption of previously cheaper, high strength drinks.
Effective February 2023
 
 

Student Loans

Student Loan Piggy bank
Whilst there is no imminent change to student loan repayments, the Government has recently announced sweeping changes to the whole student funding system, starting in September 2023.
 
For the current tax year, the earnings threshold at which you start paying back your student loan remains at £27,295, with tuition fees capped at £9,250.  For postgraduate loans, the repayment threshold remains at £21,000. See here for the full lowdown on student loans.
 
 

Check how the 2022/23 tax changes will affect you: Tax Guide – MoneySavingExpert

 

Low Earners

 

Minimum wage increases

By law, there is a minimum hourly rate that most employees should be paid, depending on their age and if they are an apprentice. The Government reviews minimum wage rates each year and they are usually updated in April.
 
The National Living Wage applies to workers aged 23 and over. It will rise from £8.91 to £9.50/hour, which equates to an extra £1000 a year for a full-time worker.
 

 

What is the National Living Wage?

The lowest wage that can legally be paid to employees aged 23+.
It is reviewed annually and is supposed to reflect the amount someone needs to earn to cover the basic costs of living and lead a decent life.
 

 
The National Minimum Wage also increases (for people who are above school leaving age but under 23, or an apprentice). All new rates are shown in the table below.
 

National Minimum Wage Rates from April 2022

 

Age 23 and over (National Living Wage) Age 21 to 22 Age 18 to 20 Under 18 Apprentice
£9.50 £9.18 £6.83 £4.81 £4.81

Source: GOV.UK

Check here to see if you’re earning the legal minimum, or if you’re owed payments from past years.
Note most interns should be paid at least the minimum wage, whatever the length of your internship. If there are any problems, you should take it up with your employer in the first instance, and if it remains unresolved, get advice from Acas, or report it to HMRC, who will investigate.
 
 

Benefits go up

Financial Support - wh bkgrd-cropped
Universal Credit
The temporary measures introduced during the height of the pandemic included a £20/week top up in Universal Credit (worth £1,000 a year).  Once this ended, the Chancellor has been under pressure to help those on the lowest incomes.
 
He has now cut the taper rate from 63% to 55% – this is the rate at which you lose benefits for every £1 you earn above £515/month – which means that workers who claim Universal Credit will be able to keep an extra 8p for every £1 they earn. They will also be allowed to earn more before Universal Credit entitlement is reduced.
Introduced December 2021
 
Other benefits have gone up by 3.1%, including Jobseeker’s Allowance (JSA), and Housing Benefit. However, this increase has been widely criticised as insufficient to support poorer people through the current cost of living crisis.
 
Renters
The government has set aside a £65m support package to help renters who have fallen into arrears due to the pandemic.

 

 
If you are struggling to pay rent and bills, don’t delay seeking help.
Here are 2 good sources of free advice, including how to access support:
Citizen’s Advice – If you can’t pay your bills because of coronavirus

Shelter – Money & rent problems
 

 
 

The Environment

 
Given the worsening climate change and the Government’s 2050 net zero emissions pledge, we might have expected the Budget to deliver more green initiatives, but there are a couple of notable incentives.

 

Homeowners: savings on energy efficiency

VAT cut on energy saving materials: VAT will be cut from 5% to zero, to help homeowners install energy saving devices such as solar panels, heat pumps and insulation.
Effective April 2022
 
Heat pump vouchers: Up to 90,000 households will get a £5,000 voucher to encourage replacement of gas boilers with more environmentally-friendly heat pumps.

 

Savers: NS&I Green Savings Bonds

Government-backed Green Savings Bonds were launched in October 2021. You can invest £100 – £100,000 for a 3-year term, at a guaranteed fixed interest rate of 0.65%  (however, as this is well below the current inflation rate, it may not be an attractive savings proposition at the moment). The money you invest helps to finance green projects such as renewable energy,  protecting natural resources and preventing pollution. Find out more here.

 
 

Travel Costs

 

Trains – rail fares up

Train fares go up by 3.8%, the biggest hike in nearly a decade. But with many of us switching to flexible working, or WFH permanently, we may not need a full season ticket, reducing the impact on our wallets.
Effective 1st March  2022

 

Motorists

Temporary fuel duty cut:  As the cost of fuel has soared to record highs, the Chancellor announced that duty on petrol and diesel will be reduced by 5p a litre.
Effective March 2022, for one year
 
However, car tax will rise in line with the Retail Price Index (measure of inflation). The higher the emissions your vehicle produces, the more you will pay, so fully electric cars are exempt.  Check vehicle tax rates here.

 
Holiday Piggy

Flights – domestic cheaper, long-haul pricier

Air passenger duty will be halved for domestic flights within the UK, benefitting about 9m passengers a year. But long-haul flights will incur higher duty, to reflect their environmental impact.
Effective April 2023

 

The return of roaming charges

Following Brexit, most networks will reintroduce roaming charges in EU countries, which means it will become more expensive to use your mobile data abroad. You can check here if your network is affected and what you can do about it.

 
 

Other Costs

 

Energy bills increase

The energy price cap limits how much suppliers can charge customers. And last year, that meant the unprecedented surge in wholesale prices could not be passed onto customers, forcing many suppliers out of business. However, in April the price cap will be raised, so consumers will face higher fuel bills, estimated at an additional £400 this year for the average household. See this Energy Price Cap guide  for more information on current energy prices and options.
Effective April 2022

 

Insurance savings

Many car and home insurance companies increase prices for existing customers at renewal, believing that they are unlikely to switch. At the same time, they attract new customers with competitive, lower-priced policies. For this reason, people have been encouraged to shop around when contracts end and consider switching every year. But from January 2022, insurers were banned from charging existing customers more than new ones, resulting in an estimated saving for consumers of £4.2billion over the next 10 years.
Putting money in piggy - wb
 
 

How will the financial changes affect you?

Use this tool to estimate the impact on your pocket from the financial measures that have been introduced this year:

Budget calculator: find out if you are better or worse off  – Sky News
 
 
Sources:
The Times Money Mentor – What does the Autumn Budget 2021 mean for you?
The Guardian – Budget 2021: key points at a glance

The Guardian – Spring Statement 2022: key points at a glance

Which? – Autumn Budget 2021: what it means for your money
 
 

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