Investing

How to soften care tax blow: Boris hits investors to fix care crisis

Boris Johnson yesterday announced a tax raid on workers and investors to finally tackle the care funding crisis. But how will it hit your pocket — and is there anything you can do to soften the blow?

For the health and social care levy, workers will pay an extra 1.25 per cent on top of their National Insurance (NI) contributions.

This means an employee on a £30,000 salary will pay an extra £255 a year, and a worker earning £50,000 will cough up an additional £505. Over-65s who are still in work will also be hit by the new levy.

Tax hikes: Boris Johnson yesterday announced a raid on workers and investors to finally tackle the care funding crisis

An extra 1.25 per cent will also be added to the dividend taxes that investors have to pay from April next year. This will hike the rate paid on dividend payments above £2,000 from 7.5 per cent to 8.75 per cent for basic rate taxpayers.

Plough pay into your pension

You can lower your NI bill by saving more into your pension if your employer offers a salary sacrifice scheme.

This means your salary is lowered by your pension contributions, so no NI or income tax needs to be paid on that portion of it. Cycle to Work schemes function in the same way.

Workers currently pay NI contributions at 12 per cent on income between £9,568 and £50,270 a year. Above this, the rate of NI falls to 2 per cent, so sacrificing salary at that level becomes less rewarding, according to Sarah Coles, of investment platform Hargreaves Lansdown.

Currently, if you saved £1,000 a year into your pension on a £30,000 salary, you would save £120 in NI and £200 in income tax a year, according to Hargreaves Lansdown. 

Under the new tax regime, you would still save £200 in income tax but your NI saving would rise to £132.50 a year.

But Ms Coles warns: ‘Bear in mind that this has cut your salary, so anything based on your salary could be affected. If, for example, your employer offers life insurance as a multiple of salary, it will be on this new, lower amount.’

Cutting your salary in this way could also affect how much you can borrow on a mortgage.

Care cap: The Prime Minister announced that no one will be asked to pay more than £86,000 towards the cost of their care

Care cap: The Prime Minister announced that no one will be asked to pay more than £86,000 towards the cost of their care

Make use of ISAS

Investors and the self-employed who pay themselves in dividends will pay £600 million more as a result of the other tax hike. 

Basic rate taxpayers currently pay 7.5 per cent on dividend income over the £2,000 threshold, with higher and additional rate investors paying 32.5 per cent and 38.1 per cent respectively.

But following yesterday’s announcement, investors will be charged at 8.75 per cent, 33.75 per cent and 39.35 per cent from April.

This means a basic rate taxpayer will pay £263 on £5,000 of dividends payments — a £38 increase.

A higher rate taxpayer, who earns more than £50,270, will have to pay £2,700 on £10,000 of dividend rewards — up £100.

And an additional rate taxpayer, who earns more than £150,000, will be billed £7,083 for £20,000 of dividend income — an increase on the £6,858 they can expect to pay now. 

You can shield your savings from tax by moving them into a stocks and shares Individual Savings Account (Isa), but investors can only save up to £20,000 each year into the tax wrappers.

Analysis by investment broker AJ Bell shows that a basic rate taxpayer would save £27.50 by moving £20,000 of a £125,000 portfolio yielding 4 per cent a year into an Isa — and a further £18.78 if they did the same the following year and the dividend value continued to grow at the same rate.

By the fourth year, the saving would only be worth 53p.

How to save all you need 

The Prime Minister also announced that no one will be asked to pay more than £86,000 towards the cost of their care. But how long does it take to save such a sum?

Saving around £200 a month into a stocks and shares Isa over 20 years could generate £85,000, assuming 5 per cent growth every year.

To achieve that level of growth, you would need quite a high-risk investment strategy — but over the long term you can arguably bear that risk. 

For a lower-risk option, you could save £240 a month over 20 years at 3 pc to accumulate £80,000.

Another option is to use what is in your pension pot. Rebecca O’Connor, from Interactive Investor, says: ‘You can still contribute £4,000 a year as part of your Money Purchase Annual Allowance, or £330 a month, to a pension once you have started accessing it from age of 55.

‘So continuing to work and pay this amount into your pension from the age of age 55 to 67, when you reach state pension entitlement age and eventually retire, means you could generate enough additional pension pot to cover care costs, on top of basic retirement income needs. This assumes a 3 per cent growth rate.’

She adds that the benefit of doing this within a pension rather than an Isa is that anything left in the pension will not be subject to inheritance tax.

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