Ten big personal finance changes coming in 2022 – and what they mean for your pocket explained

PREPARE for the New Year by working out what big personal finance changes in 2022 will mean for your pocket.

Household bills, wages and pensions will be different in 2022, and you can expect to be affected by tax hikes and prices in the shops going up.

It pays to be aware of what changes will impact you, as they could affect your budget and you don't want to be caught out by nasty surprises.

You also need to know about positive changes so you can make sure you're getting everything you're entitled to.

These are the dates you need in your diary so you're clued up on all the financial changes coming in 2022.

National Living Wage

Low paid workers will get a pay rise in April when the National Living Wage increases.

It will jump to £9.50 per hour for over 23s, rising from the current rate of £8.91.

This means someone aged 23 or over on the minimum wage working a 37.5 hour week will see their weekly earnings increase from £334.13 to £356.25.

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That could mean an annual pay rise of more than £1,000, from £17,374.76 to £18,525.

Other age groups will see a similar increase to their salary next year, although the rate for under-23s is called the National Living Wage.

Workers aged over 21 will get £9.18, up from £8.36, and those between 18 and 20 will see their hourly rate rise from £6.56 to £6.83.

Under 18s will be paid £4.81, up from £4.62, and apprentices will also get £4.81, rising from £4.30 an hour.

Energy Price Cap

Energy prices have soared this year and it looks like bills are set to rise even more in 2022.

Consumers should brace themselves to pay hundreds of pounds extra from April 2022 as the energy price cap is raised.

Experts are divided on how much bills could go up by, but estimates range from £150 to £400.

The latter would take the average annual costs for someone on a default tariff from £1,277 to £1,677.

The amount will be announced in February before coming into force from April.

"The energy price cap in April is based on price increases happening at the moment, and as energy prices have leapt far higher there’s no doubt that households are in for another increase," Laura Suter, head of personal finance at AJ Bell.

"Some estimate the rise will be around £400, which would take the average annual costs for someone on a default tariff from the current £1,277 to £1,677 – and it will be even higher for those on pre-payment meters."

Council tax rates

The average UK household saw their council tax bill increase £7 a month in 2021 – and it's going to go up again.

That's because councils are looking for ways to raise more cash due to the impact of social care reforms and helping out struggling households during the pandemic.

AJ Bell estimated that the annual amount could hit £1,951 for an average Band D property compared to £1,898 this year.

However it will vary greatly across the country as the rate is set by your local authority.

This means some people will be paying much more than that, while others will have to cough up less.

"Anyone who is struggling to pay should seek help, as there is lots of support available for those on low incomes," AJ Bell said.

Rail fares

The cost of trail travel usually increases by July's RPI inflation rate, which was 3.8% in 2021.

The government can set a different price increase and it still hasn't revealed the plan for next year.

Commuters using popular routes are likely to have to pay extra.

For example, if rail fares rose 3.8%, the journey from Oxford to London – including a London travelcard – would be almost £6,700 a year.

That's £245 extra compared to the current price.

Similarly, the commute between Tunbridge Wells and London would jump £220 to £6,033.

Up north, the cost of travelling between Macclesfield and Manchester will rise by £84 to £2,284.

Many people are working from home or have made a permanent switch to flexible working, meaning they might not need a full season ticket.

But if you do know you'll need one next year, you can buy it before prices go up in January to keep your costs down.

“Commuters may face an even larger hike in January if the Government decides to raise rail fares above inflation.

"In 2021 it increased fares by 1% above inflation to help cover Government money spent as a result of lost revenues in the rail industry during the pandemic.

"As the nation has been sent back to work from home and commuting never returned to normal this year, the same logic could be used to roll out another above-inflation hike next year – although it would take a bold Government to do so when the increase is already so high."

Interest rates

The Bank of England is expected to hike interest rates from current record lows – but it hasn't announced when.

It's the longest period ever that rates haven't moved, but current expectations are that the Base Rate will hit 1% by the end of 2022.

The action you should take to prepare depends on your current financial situation.

An interest rate rise would be good for savers, but it's likely to be a delayed benefit.

You might have to switch savings accounts to benefit from the rise.

AJ Bell advises being "wary" of fixing your savings rates as that means you'll "miss out on any increase when rates do rise".

It's another story for mortgage holders, who should fix now while rates are still near record lows.

If you're on a variable rate your mortgage costs will jump overnight when the Bank finally pulls the trigger.

Similarly, if you're in debt, you should try and switch to a lower rate now before any increase happens.

Dividend tax rates

You may get a dividend payment if you own shares in a company, or if you own your own firm.

The governement announced in September that the tax rate will rise.

Directors of limited companies typically pay themselves a small salary up to the national insurance threshold and then take dividend payments from company profits.

They benefit from this as the tax on dividend tos is less than the income tax they'd pay on larger salaries.

Many freelancers, small business owners and contractors pay themselves through dividends.

You do not pay tax on any dividend income that falls within your Personal Allowance, which is the amount you can earn each year without paying tax.

You also get a dividend allowance each year and you only pay tax on income above that amount.

The dividend tax rates for next year are rising:

  • Basic rate taxpayers rise from 7.5% to 8.75%.
  • Higher rate taxpayers rise from 32.5% to 33.75%.
  • Additional rate taxpayers rise from 38.1% to 39.35%.

For example, someone who owns their own company and pays their £50,000 salary entirely in dividends, would have a £3,100.13 tax bill in the next financial year.

That's because the first £12,570 of income is within the personal allowance and so taxed at 0%.

The next £2,000 of dividend income is tax-free via the dividend allowance. The remaining £35,430 falls within the basic-rate tax band.

If they had earned that much dividend income in 2021/22 they’d be taxed at 7.5%, leaving them with a £2,657.25 tax bill.

Frozen allowances

Income thresholds for certain allowances have been frozen, meaning Brits may have to pay higher taxes.

The allowances will be:

  • Personal allowance at £12,570, and income tax thresholds frozen
  • Pensions lifetime allowance at £1,073,100
  • CGT allowance at £12,300
  • ISA allowance at £20,000
  • JISA at £9,000
  • IHT threshold and Main-residence Nil-rate Band stay the same at £325,000 and £175,000
  • Dividend allowance remains the same at £2,000

“Freezing tax allowances, combined with inflationary pressure on wages, is going to produce fiscal drag on steroids," Laura at AJ Bell said.

"This is good news for the Chancellor, who can expect to pull in more money as salaries rise, but of course that is a direct transfer from workers’ pockets.

"No-one in their right mind is going to turn down a pay rise simply to avoid tax, but workers can reduce their tax bills with a bit of financial planning, in particular using pension contributions and spreading assets between spouses in order to mitigate higher taxation.”

UK inflation rate

UK inflation is at 4.2%, as measured by the Consumer Price Index, which is its highest reading in almost ten years.

Unfortunately for consumers, "almost everybody recognises things are going to get worse before they get better", AJ Bell's Laura Suter says.

Inflation is a measure of how much the price of goods, such as food or televisions, and services, such as haircuts or train tickets, has changed over time.

So rising inflation means you'll be paying more in the shops.

It's been pushed up by rising energy prices and an increase in hospitality VAT to 20%will likely push it up again.

AJ Bell forecast it could rise above 5% next spring, putting household budgets under more pressure.

State pension

Pensioners will see a rise in their retirement payouts next year, although changes to the triple lock mean it will be less than previously expected.

The ‘old’ basic state pension will rise by £4.25 per week, from £137.60 per week to £141.85 per week

The ‘new’ flat-rate state pension will rise by £5.55 per week, from £179.60 per week to £185.15 per week.

If the earnings link had been retained, pensioners would have enjoyed a bumper 8.3% boost to their incomes.

That would have pushed the full flat-rate state pension to £194.50 per week or £10,114 per year. 

Instead, the benefit will rise by £5.55 to £185.15 per week or £9,627.80 per year.

In other words, the decision will ‘cost’ those in receipt of the full flat-rate state pension £486.20 in state pension income in 2022/23.

“The decision to scrap the earnings element of the state pension triple-lock in 2022/23 means retirees will ‘only’ enjoy a 3.1% rise in the benefit in April next year," AJ Bell said.

“Savers also face the risk of inflation climbing higher next year, meaning a 3.1% increase might actually feel like a cut in real terms."

National insurance rate rise

Employee national insurance is set to rise next year as part of a plan to pay for adult social care.

It will jump from 12% to 13.25% on earnings between £9,568 per year and £50,270 per year.

It will increase from 2% to 3.25% on earnings above £50,270.

For example, take someone who is employed with total taxable earnings of £30,000.

In 2021/22 they would pay National Insurance at 12% on earnings between £9,568 and £30,000, leaving them with a bill of £2,451.84.

In 2022/23 if the thresholds stay the same, but the rate increases to 13.25%, they will have to pay.

Some reports suggest the ‘primary threshold’ above which the tax is due will increase from £9,568 to £9,880 in 2022/23.

If this is the case, NI at 13.25% leaves them with a total NI bill of £2,665.90.

AJ Bell said: "The decision to hike NI rather than income tax was controversial, not least because pension incomes are not subject to NI – meaning older people who are more likely to benefit from the reforms in the short-term have largely been excluded from paying for them.

“For savvy savers, the NI hike makes pensions salary sacrifice more attractive, as contributions are taken from your earnings before employer and employee NI has been deducted.”

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