Promised tax rises are on the way for millions within weeks, impacting expats with savings and investments in the UK.
Table of contents
- Frozen Tax Allowances
- Dividend Tax Up
- State Pension Rise For Expats
- Hedging Against Higher Taxes
- April 2022 Tax Changes Hit UK Investors FAQ
- Related Information
Chancellor Rishi Sunak signalled tax changes were on the way in his last Budget as part of his efforts to raise the cash drained from Treasury coffers by the coronavirus pandemic.
The rises cover a wide range of consumer taxes from April 6, leaving most savers and investors facing higher HM Revenue & Custom bills.
Here we look at some key tax changes and how savers and investors can shield their money.
Rather than cut taxes, Sunak has resorted to freezing allowances. This policy delays cost-of-living increases built into many taxes that compensate taxpayers for inflation. Four main taxes suffer from the Chancellor’s big freeze:
Expats with a UK personal allowance, like landlords, will see tax-free earnings threshold stick at £12,570, or £50,270 for the higher rate threshold. These rates will stay the same until April 2026.
Any expat earning £50,000 a year or more will pay at least an extra £5,000 in income tax between April 6, 2022, and April 5, 2026.
If inflation continues to rage at the current rate, freezing the pensions lifetime allowance (LTA) for four years is the same as cutting the limit someone can save for retirement.
Far from a measure to tap wealth by taxing excess savings, an LTA of £1,073,100 threatens to stifle setting aside money for retirement for a generation.
Investors selling property, stocks and shares or other valuable assets see their annual exempt amount frozen at £12,300 until April 2026.
If you have an ISA allowance, consider investing under this tax wrapper, which is CGT free when you dispose of stocks and shares, avoiding the CGT charged to individual investors.
In line with other personal taxes, the IHT threshold (£325,000) and Main Residence Nil-Rate Band £175,000) are frozen at current levels until April 5, 2026, in the hope of raising an extra £1 billion for the Treasury.
Read our latest article about IHT changes.
Almost forgotten but still lurking in the background is the social care tax, a levy on profits paid to investors.
The Chancellor is hiking dividend tax rates by 1.25 per cent across the board:
|Tax status||Current rate||New rate from April 6|
For example, a director paid by £50,000 in dividends instead of drawing a salary, pays nothing on the first £12,570 of income, leaving the rest (£35,430) within the basic rate band. Dividend tax is applied at the basic rate of 8.75 per cent, coming to £3,100 – £440 more than the current rate.
Ministers rushed to drop the State Pension Triple Lock last year when an anomaly in the formula threatened to boost the payment by around the 8 per cent blip in earnings tripped by businesses closing during the pandemic lockdown.
Nevertheless, the state pension still rises by 3.1 per cent – but only for expats in the European Economic Area (EEA) or living in places on the list of countries with reciprocal social security agreements with the UK.
The new state pension, claimed by those reaching state pension age on or after April 6, 2016, rises from £179.60 to £185.15 a week.
Spending power at 7 per cent inflation is the same as cutting the new state pension to £173.04 a week.
The basic state pension also increases – from £137.60 a week to £185.15.
Many savers and investors can become more tax-efficient simply by reorganising their portfolios.
Tax breaks are written into the legislation to reward savers and investors for their efforts. Following these tips can help relieve the tax burden for many.
If you are an expat resident in the UK, these tax breaks will work for you.
Setting more money aside for your pension is a good way to save tax. Higher rate taxpayers see their funds increase by £1,000 for every £600 they save – the £400 balance comes from tax relief on contributions.
Once in a pension, the fund grows tax-free and 25 per cent of savings can be taken without paying income tax. The rest of the cash is taxed, but probably at a lower rate than your earnings while working as your retirement income is likely lower.
Stocks and Shares ISAs don’t come with upfront tax relief like pensions, but the fund grows tax-free and no tax is paid on money drawn from an ISA.
Dividends are tax-free when paid on shares held within an ISA.
Bed-and-ISA is a strategy for investors to sell shares, crystallising profits and CGT. Simply sell shares held as an individual and buy them back straight away with your ISA.
If you are worried about Inheritance Tax and have already exhausted the limits you can hand to others as gifts, consider putting money into London’s Alternative Investment Market, a stock exchange for smaller companies.
No IHT is paid by an estate on AIM shares after they have been held for two years.
The Seed Enterprise Investment Scheme (SEIS) allows investors who have maxed out their pension and ISA limits to stake up to £100,000 a year against start-ups.
SEIS offers 50 per cent income tax relief on investments up to £100,000 each tax year. If you invest the full £100k, you can claim a refund of up to £50,000 income tax paid. Shares in SEIS companies grow free of CGT and if a deal turns sour, loss relief is available as well.
EIS (Enterprise Investment Scheme) and VCTs (Venture Capital Trusts) work in a similar way but with higher investment and tax relief thresholds.
If you are married or in a civil partnership, you can buddy up to shift assets between you without triggering tax.
You can buddy up to give a basic rate taxpayer a larger share to reduce the amount you pay as a higher rate taxpayer.
For example, as a 40 per cent taxpayer, you want to sell a buy to let worth £280,000. Assuming a net gain of £141,700, the owner has £38,149 CGT to pay. Passing a 50 per cent share to a spouse reduces the CGT for each owner to £16,589.
The total tax paid by the couple is £33,178 – a reduction of £4,971.
You need to tell HMRC what’s going on by filing a Form 17 with a declaration of trust. The cost varies between law firms but should come in between £400 and £1000.
AIM is a sub-market attached to the London Stock Exchange which helps small companies raise capital.
Nearly 4,000 companies have used the exchange since opening in 1982. Many CEOs consider AIM a step on the way to the full listing in the FTSE350 of large businesses. AIM works in the same way as the FTSE, but investors consider the market a higher risk than its bigger cousin.
You can invest in AIM companies directly or through a diversified fund.
Two routes are available to SEIS investors – going direct to a company seeking to raise funds or via a specialist fund.
Many SEIS companies pitch for investment through crowdfunding platforms.
British expats can benefit from UK tax breaks for savers and investors if they remain resident in the country.
Expats on assignment who intend to return to the UK when their time overseas ends are likely to stay UK tax resident, while others who have spent more than six months living in another country and intending to stay abroad are likely to become tax resident there.
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