Key personal finance changes come into effect in the new tax year, which are likely to impact clients’ savings, says Aegon.
As of 6 April, workers will face a 1.25% rise in National Insurance contributions, despite calls for the Government to defer the increase in the face of rising inflation and the soaring cost of living. The move, designed to fund the Government’s social care reforms, will increase employers’ payroll costs, while reducing employees’ take-home pay.
Steven Cameron, pensions director at Aegon, said: “There had been calls for the 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 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.”
Pensions are likely to become a key issue for savers in light of the new personal finance changes, says Aegon.
Under the triple lock, the state pension increases each year according to the highest of earnings growth, inflation or 2.5%. However, for 2022/23, the Government has removed the earnings component to avoid distortions created by the pandemic and furlough. As a result, the state pension is set to rise by 3.1%, which is only half the current inflation rate of 6.2% and could leave those heavily reliant on the state pension severely overstretched, Aegon has warned.
However, the Chancellor has confirmed that the triple lock will be reintroduced in 2023 and with inflation set to rise to 8% or more later in the year, pensioners could see a “bumper increase” to the state pension in April 2023.
The Government has also chosen to freeze the pensions lifetime allowance at £1,073,100.
Cameron said: “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. 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.”
Millions of workers are also set to be affected by the freeze on income tax thresholds until 2025/26. Aegon said that due to inflationary increases in earnings, many more workers will find a larger proportion of their earnings subject to income tax.
Additionally, more people will find they become higher rate taxpayers even though their earnings may have failed to increase in line with inflation.
However, there was more promising news in the form of the National Living Wage increase. As of April, the NLW will rise by 6.6% to £9.50 an hour, a positive step not only for people’s income but increased contributions to workplace pensions.
The increase will mean an additional £86 going into pensions over the course of the year, which thanks to compound investment growth over many years could prove beneficial to future retirement savings, particularly for younger people.
[Main image: javier-allegue-barros-C7B-ExXpOIE-unsplash]
