The Cost of Covid - Careful Tax Planning has never been more important!
What is the ‘triple lock’, and how might this change affect your pension?
The triple lock dictates that UK state pensions increase annually in line with the rising cost of living, increased average wages, or a minimum of 2.5% - whichever is highest.
As announced by the UK government, the triple lock will be suspended for the 2022/23 tax year due to an unexpected surge of 8% for average wages as we recover from the pandemic.
So next year, UK state pensions will either rise by 2.5% or match the rate of inflation. This will not come close to the 8% salary rise but could be between 3-4%, in line with inflation. This is expected to save the Treasury an estimated £4bn.
The government has promised to reintroduce the triple lock for the 2023/24 tax year, but we need to see what happens if salaries continue increasing. The Department of Work and Pensions (DWP) previously confirmed that British expatriates living in the EU will continue to receive the annual state pension increase, at least until March 2023. But it’s worth being aware that the UK state pension is frozen for expatriates living further afield.
What are the implications of the dividend tax and NIC rise?
In its 2019 manifesto, the UK Conservative party promised to retain the triple lock for pensions and assured voters that National Insurance contributions and income tax would increase, so this is a significant change which they openly recognise and carries potential political risks.
However, as record-breaking waiting lists for the NHS seem to be spiralling out of control, the government concluded that a 1.25% rise in NIC maybe the only equitable solution available. From April 2023 this will effectively become a tax levy (rather than NI) –the ‘Health and Social Care Levy’ – so it seems here to stay for the foreseeable future.
The dividend tax rise was an unwelcomed surprise, affecting anybody in receipt of dividend income above the £2,000 allowance. From April 2022, basic rate taxpayers will pay 8.75%; higher rate taxpayers 33.75%, and additional rate taxpayers 39.35%.
Can we expect further tax rises in the UK and Europe?
The Covid-19 pandemic threatened to have a catastrophic effect on the global economy. The impact has been mitigated to a degree by government schemes and initiatives, but this has ultimately thrown not only the UK, but almost every country in Europe, into higher debt.
We may see similar moves by other European governments as they try to reduce the deficit incurred over the last 18 months. The UK’s recent tax hike, aimed at raising more than £36bn over the next three years, could be the first of many over the coming years.
According to calculations by the Institute of Fiscal Studies, the overall tax burden of a UK resident now stands at 35% – a 70-year high. So itis important to stay informed on the situation as it continues to develop.
Other European countries, such as Spain, are likely to be considering their options to reduce their Covid debt.
What can you do?
The changes in policy and decisions we have just seen in the UK may not have happened in a pre-Covid world. But the landscape is very different now and we need to be prepared for more tax rises.
While we all understand the importance of playing our part in restoring the damage caused by the pandemic, sudden changes in tax legislation can potentially lead to paying more than islegitimately required. How you hold your assets can make a difference to how much tax you pay, and if you still have the structures you used in the UK, you may be missing out on the tax planning opportunities provided by the local regime in Spain. It’s more important than ever to ensure your financial planning is specifically designed for a resident of Spain.
To receive guidance during this time of change, it is important to seek tailored, expert advice. Getting the right help from trusted advisers will help you stay ahead of the curve and plan for almost every contingency.
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice..
Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax
information has been summarised; individuals should seek personalised advice.