Tax Planning

The Value of Covid – Cautious Tax Planning has by no means been extra essential

The Covid pandemic has placed a heavy economic burden on governments across Europe. New initiatives such as vacation programs and government grants have been introduced to alleviate much of the stress caused by lockdowns and the decline in domestic productivity. While these measures provided much-needed assistance, they resulted in significant government debt.

In the first week of September 2021, the UK government announced a 1.25% increase in Social Security (NI) contributions, higher tax rates on dividends and a freeze on the triple lock on UK pensions.

What is the “triple lock” and how could this change affect your pension?
The triple lock requires that UK state pensions increase annually as the cost of living rises, average wages rise, or at least 2.5%, whichever is greater.

As announced by the UK government, the triple lock will be suspended for the 2022/23 tax year due to an unexpected 8% increase in average wages as the pandemic rebounds.

So for the next year, UK state pensions will either rise 2.5% or adjust to inflation. This won’t come close to the 8% raise, but could be anywhere from 3-4% in line with inflation. This is expected to save the Treasury Department £ 4 billion.

The government has promised to reintroduce the triple lockdown for the 2023/24 tax year, but we’ll have to see what happens if salaries continue to rise. The Department of Work and Pensions (DWP) previously confirmed that UK expatriates living in the EU will continue to receive the annual state pension increase until at least March 2023. It should be noted, however, that the UK state pension for expatriates will be frozen further out.

What are the effects of the dividend tax and the NIC hike?
In its 2019 manifesto, the UK Conservative Party pledged to maintain the triple lockdown on pensions and assured voters that social security contributions and income tax would rise.

However, as record-breaking waiting lists for the NHS seem to be spiraling out of control, the government concluded that a 1.25% increase in the NIC may be the only fair solution available. As of April 2023, this will effectively become a tax levy (instead of NI) – the “Health and Social Contribution” – and so it seems to remain in place for the foreseeable future.

The dividend tax hike was an unwanted surprise affecting anyone receiving dividend income above the £ 2,000 exemption. From April 2022, property taxpayers will pay 8.75%; Taxpayers with a higher tax rate of 33.75% and taxpayers with an additional tax rate of 39.35%.

Can we expect further tax hikes in the UK and Europe?
The Covid-19 pandemic threatened to have catastrophic effects on the global economy. The impact has been mitigated to some extent by government action and initiatives, but this ultimately drove not just the UK but almost all countries in Europe into higher debt.

We may see similar moves by other European governments as they try to reduce the deficit that has been created over the past 18 months. The UK’s recent tax hike, which is expected to raise more than £ 36 billion over the next three years, could be the first of many in the years to come.

The Institute of Fiscal Studies has calculated that the total tax burden on a UK resident is now 35% – a 70-year high. Therefore, it is important to stay informed as the situation evolves.

Other European countries like Portugal are likely to consider their options to reduce their Covid debt.

What can you do?
The changes in policy and decisions that we just saw in the UK may not have happened in a pre-Covid world. But the landscape is very different now and we have to prepare for further tax increases.

While we all know the importance of doing our part to restore the damage caused by the pandemic, sudden changes in tax laws can potentially result in more being paid than is legally required.

The way you hold your assets can have an impact on the amount of taxes and if you still have the structures that you used in the UK, you may be missing out on the tax planning opportunities offered by the local regime in Portugal . It is more important than ever to ensure that your financial planning is specifically tailored to a Portuguese resident.

In order to get orientation in this time of change, it is important to seek tailor-made, expert advice. Getting the right help from trusted advisors will help you stay ahead of the curve and plan for almost any emergency.

Tax rates, scope and tax breaks are subject to change. All taxation statements are based on our understanding of current tax laws and practices, which are subject to change. Tax information has been summarized; Individuals should seek personal advice.

By Adrian Hook

Adrian Hook is a partner at Blevins Franks in Portugal and has been providing holistic financial planning advice to British citizens in the Algarve since 2008. He holds a Diploma in Financial Advisor (DipFA) and is a member of the London Institute of Banking and Finance (LIBF).

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