Important information - the value of investments can go down as well as up so you may get back less than you invest.
IT’S not just the hot weather that will have Boris Johnson sweating through his shirt today.
The Prime Minister has announced plans to raise National Insurance rates by 1.25 percentage points for employers and employees, with tax on share dividends rising by the same amount. And while everyone was debating whether this would solve the country’s long running social care challenges, the government also rolled-back on a long running election manifesto: suspending the triple lock for the state pension for one year.
The triple lock promises to raise the state pension by the highest of any rise in inflation, wages or 2.5%. Right now, the highest of those is wages, where the official measure is forecast to come in around 8% higher than last year.
The triple lock was introduced to ensure pensioners did not see the cost of living outpace their income. The argument in favour of tweaking the triple-lock is that this year’s 8% wage rise reflects a pandemic-induced quirk in the statistics that needn’t be reflected in state pension payments.
The counterargument is that the UK’s state pension has historically been low. Even after an 8% rise, it would still be low versus other countries. At its current level, the UK State Pension is worth just 29% of the average UK wage while the average across OECD nations is 63%.
Back to our NI contributions and social care. Plans are that the money raised will contribute to a “health and social care levy” to help manage NHS waiting lists and tackle the social care crisis.
So far, the plans have been received to near-universal disdain, with the staunchest criticism coming from within the Prime Minister's own party.
The move to raise National Insurance is particularly controversial given that pensioners are excluded from National Insurance payments. That’s fuelling fears that any rises will disproportionality impact the young.
There’s also concern the proposals favour the rich. National Insurance is currently paid at 12% of income, but higher earners only pay 2% on salaries above £50,000, nor is it levied on dividends and rents.
There have been plenty of calls for a more progressive form of taxation, either by raising income tax rather than National Insurance, or one that focusses more heavily on share earnings.
Aware of the dangers, the Prime Minister has pledged to tax pensioners who are working (currently they don’t pay National Insurance) to counteract objections of generational bias, while the 1.25 percentage points increase in taxation on dividends is designed to do away with claims the levy disproportionately impacts lower-income workers.
It’s worth noting that shares held in ISAs are not subject to dividend tax, and those held outside are protected by a £2,000 tax-free dividend allowance.
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to a Fidelity adviser or an authorised financial adviser of your choice.
Share this article
Financial Friday: Three ways to beat the rising cost of living
Life is getting more expensive so what can you do about it?