Costs & taxes to watch in 2021
This content is for information purposes only and should not be taken as financial advice. Every effort has been made to ensure the information is correct and up-to-date at the time of writing. For personalised and regulated advice regarding your situation, please consult an independent financial adviser here at Castlegate in Grantham, Lincolnshire or other local offices.
The UK economy is changing in 2021 as we emerge from the COVID-19 lockdown, and a range of taxes and household bills are heading for transition. In this article, our team here at Castlegate (financial advisers in Lincolnshire) offers a review of some of the key headlines as we approach the winter, and how these may affect your financial plan. We hope you find this content helpful. If you want to discuss your own financial plan with us, please get in touch to arrange a no-obligation financial consultation, at our expense:
01476 855 585
Rising National Insurance
For years now, the problem of how to pay for social care in the UK has plagued successive governments. Presently, it is not unheard of for older people to eventually deplete their estate – including selling their family home – to pay for residential care. To address this, Prime Minister Boris Johnson has announced that National Insurance (NI) will be rising by 1.25%; intended to raise £36bn for health and social care over the next three years. For those above State Pension age, this should not be a concern (since you do not pay NI). However, workers and company owners will need to factor this extra monthly cost into their budget. Fortunately, the new levy will not be introduced until April 2022, so you have plenty of time to prepare your finances.
Rising dividend tax
In 2021-22, there is a £2,000 annual tax-free dividend allowance which sits outside of your ISA. Once used up, Basic Rate taxpayers pay 7.5% on their dividends and Higher Rate taxpayers pay 32.5%. However, the Government has also announced that tax on dividends will rise 1.25% from April 2022. This may not sound like much, but given that dividends have already been cut by many companies since the outbreak of COVID-19, even a small tax rise could represent a large erosion of your investment returns. One way to mitigate this is to make sure you are using your £20,000 annual ISA limit to full effect, since dividends within this wrapper are tax-free.
Rising energy costs
It is no secret that the UK is facing problems with petrol supply, as well as rising energy costs. Many possible explanations exist for why this is, including rising natural gas prices coming from Russia. To protect UK consumers, there is an energy price cap (formerly £1,277) set by Ofgem which limits how much households can be charged for gas and electricity. Since 1st October, however, this limit has been raised to about £1,660.
For those currently on a deal, this will not immediately affect you. However, energy suppliers have been steadily going out of business since the rise in gas prices. If your supplier goes bust, then you will be transferred to another supplier – where you will be subject to the new, higher cap. Some analysts have forecast that certain households could end up paying £400 more than they currently do, in the spring. To protect your finances, consider delaying switching (if you can) until next year when prices hopefully come down to a lower level. If this is not an option, then it may be worth making your home more energy efficient (e.g. insulation) to save money on heating over the longer term.
Insurance rule changes
Some important changes are coming to car and home insurance on 1st January 2022. The “loyalty premium” (or price walking) will be coming to an end, whereby automatic renewers of insurance have, historically, been charged more than switchers year-by-year. According to one report, 6m people are charged up to 150% more compared to new customers, but the financial regulator will be making changes to try and stop this from happening. Prices for automatic renewers are unlikely to drop significantly, however. Instead, consider switching soon if you can, since the cheapest deals are likely to be found in the months leading up to this change.
Inflation & interest rates
The Bank of England (BoE) has a target 2% rate of inflation which, at the time of writing, sits at 3.2%. This is widely expected to keep rising in the months ahead, driving up the cost of living. Whilst the UK can arguably tolerate a “transitory” (temporary), small rise in inflation as the economy starts moving again out of lockdown lifting, it will “overheat” if this starts to rise too far, too quickly. As such, a rise in interest rates is starting to look realistic – perhaps early next year. This will be good news for regular savers who currently see pitiful returns on their cash savings. However, for homeowners on a standard variable rate (SVR) – and those on a fixed-rate deal which is coming up for renewal soon – this could represent a looming rise in monthly mortgage costs. To get ahead of this, consider whether remortgaging now might save you money in the medium term (since the base rate still, currently, sits at an historic low).
Conclusion & invitation
If you are interested in discussing your own financial plan or protection strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:
01476 855 585