Increases to National Insurance and Dividend Tax

The government’s recent announcement of increases to National Insurance and Dividend Tax has not been without controversy. For starters it breaks the government’s manifesto pledge on tax increases.

Given these increases will have an impact on you and your business we thought it appropriate to discuss the changes below.

Increases to National Insurance and Dividend Tax

When do the Increases to National Insurance and Dividend Tax take effect?

The government’s  new plan published by HMRC suggests the 1,25% increases to National Insurance and Dividend Tax will be utilised to fund for the NHS as well as the social care sector. This new increase is due to take effect from 6th April 2022

National Insurance increase

It is noticeable that the government has been very cagey about the NIC thresholds that will apply from the 2022/23 tax year. This makes it difficult to calculate the actual cost of this proposed increase

From 6 April 2023 this NIC increase will be replaced by a new, UK-wide 1.25% Health and Social Care Levy. The levy will be ringfenced for health and social care and based on NIC. It will also be applied to those people working above the state pension age who do not currently pay NIC.

This means that the 2022/23 NIC rates will then revert to those levels in the 2021/22 tax year

The increase will be applied as follows:

  • To Employers and Employees NIC (Class 1 Primary and Secondary Contributions)
  • To benefits in kind (Class 1A NIC)
  • PAYE settlement agreements where an employer agrees to meet the liability on an employee’s ‘perks’ (Class 1B NIC)
  • The self-employed either operating as a sole trader or partnership (Class 4 NIC which is based on profits)    

Classes 2 and 3 NIC which are payable at a fixed weekly rate will not be affected by this proposed increase.

The Dividend Tax increase

The new increase will also impact on those individuals paying the Dividend tax who will also suffer a 1.25% increase.

Once again, the government appears to be playing its cards proverbially close to its chest by not indicating whether any changes to the tax-free dividend allowance for 2022-23 will apply. It also chooses not to divulge any proposed alterations to the basic or higher rate tax bands either. Frustratingly this means that no one can accurately predict the increased tax burden on anyone receiving a fixed rate of dividends

These changes will also have a wider impact on director/shareholders and their loan accounts with their company

The rate of tax applied to overdrawn director’s loan account is linked to the higher rate of dividend tax. This means the current tax rate of 32.5% on overdrawn loan accounts will increase from 32.5% to 33.75%. This makes it particularly important for directors to keep a close eye on their personal drawings over the next few years!

Finally. Scottish taxpayers may feel especially aggrieved by these changes.  Because Scottish NI thresholds are linked to the UK this means Scottish taxpayers with employed earnings between £43,662 and £50,270 per annum will be liable to a marginal tax rate of 54.25% on that part of their income, from April 2022.

This marginal rate is 54.25% as opposed to a marginal rate of 33.25% for taxpayers elsewhere in the UK, in the same income bracket!

For more useful information, check out our Ebooks here.

And if you'd like to know how we can help you with all of this, or with anything else, feel free to give us a call on 01202 048696 or email us at [email protected].

Alternatively, please feel free to complete our Business Questionnaire here.

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