National Insurance and dividend tax rises announced for social care reform
** On 23rd September, the Government announced the reversal of planned increases in National Insurance contributions and dividend tax rates which apply to employees, directors, the self-employed and investors. Read more here.**
From April 2022, the Government plans to create a new social care levy which will see UK-wide tax and National Insurance Contribution (NICs) increases. There will be a 1.25% increase in NICs on earned income, with dividend tax rates also increasing by 1.25%. The money raised will be ringfenced for health and social care costs.
The levy will be a new tax and separate from NICs, but it will take some time for HMRC to update their IT systems. Initially the funds will be raised by increasing the NICs rates. Once HMRC systems have been updated (anticipated in 2023-24), a new surcharge of 1.25% will replace the increase in NICs rates and will also apply to those working above State Pension age.
Mr Johnson described the package as the “biggest catch-up programme” the NHS has ever seen.
In the initial years of the new health and social care levy, the £12bn additional funds will support handling the backlog of patients within the NHS. The funding also ring-fences £2.2bn annually for Scotland, Wales and Northern Ireland.
How much extra will I have to pay?
The Health and Social Care Levy will apply to employees and employers liable for Class 1 NICs and to self-employed individuals liable for Class 4 NICs. It will be introduced from April 2022.
For an average basic rate employee earning £20,000 per annum, they will contribute an additional £130 a year. Meanwhile a typical higher rate employee earning £80,000 per annum will pay a further £880 a year.
It’s important to note the NIC increase will also apply to employers too, who will pay an additional 1.25% in employer NICs from April 2022.
Employers will have to pay the levy for employees earning above the Secondary Threshold of National Insurance, which is £8,840 in 2021-22. Existing reliefs will continue to apply for employers of apprentices under the age of 25, all employees under the age of 21, veterans, and new employees in Freeports from April 2022.
The Employment Allowance allows eligible employers to reduce their NICs liability by up to £4,000 per year and this means the Government believe that 40% of small business owners will paying nothing extra in employer NICs.
The Health and Social Care Levy will become a separate tax on earned income from April 2023 and NICs rates will then be reduced by the temporary increase.
We have shown below how it is expected the rates will increase for employees and employers:
| Employee Main / higher rate | Employer | |
|---|---|---|
| Current NICs rates (2021-22) | 12% / 2% | 13.8% |
| 2022-23 NICs rates | 13.25% / 3.25% | 15.05% |
| Charged on all earnings/profits above: (2021-22 thresholds) | £9,568 | £8,840 |
We have also included a table to show the impact on the Self-Employed:
| Self-employed main / higher rate | |
|---|---|
| Current NICs rates (2021-22) | 9% / 2% |
| 2022-23 NICs rates | 10.25% / 3.25% |
| Charged on all earnings/profits above: (2021-22 thresholds) | £9,568 |
Working pensioners over the age of 65 are currently exempt from NICs. However, from April 2023, working pensioners will also be required to pay their 1.25% contributions to the health and social care levy.
Dividend tax also set to rise
Individuals who receive dividend income will also face a higher tax bill as all rates of dividend tax will increase by 1.25% from April 2022.
The dividend tax is applicable on dividend income above the frozen £2,000 dividend allowance and above the £12,570 personal allowance. Dividends on assets held in ISAs are excluded from the dividend tax.
From the 2022-23 tax year, basic rate dividend tax will be charged at 8.75% instead of 7.5% this year. Higher rate dividend taxpayers will be charged at 33.75% instead of 32.5% and additional rate dividend taxpayers will pay 39.35% instead of 38.1% respectively:
Dividend Tax Rates
| Basic Rate | Higher Rate | Additional Rate | |
|---|---|---|---|
| Current dividend tax rates (2021-22) | 7.5% | 32.5% | 38.1% |
| 2022-23 dividend tax rates | 8.75% | 33.75% | 39.35% |
Many small business owners operating through limited companies will pay themselves a combination of a modest PAYE salary and the remainder in dividends. This tax increase on dividend income follows the announcement that Corporation Tax is also due to rise.
From April 2023, Corporation Tax is set to rise from 19% to 25%. The government will introduce a new Small Profits Rate of 19% for companies with annual profits of £50,000 or less and for companies with profits between £50,000 and £250,000, they will pay tax at the main rate of 25% reduced by a marginal relief providing a gradual increase in their tax rate.
Daren Moore FCCA, Group Commercial Director at TaxAssist Accountants, said: “These announcements were made well before the planned Autumn budget and will represent a significant tax rise for many.
“While many will argue about the politics of such a move, the stark reality is that tax rises are widely expected as the economy starts to recover from Covid-19. We believe there will be more to come as the Government tries to balance its finances and support investment in public services.
“The challenge for all those businesses and individuals impacted is to understand what these changes will mean and how they best plan for them.”
If you’d like any help with redefining the most tax efficient way to pay yourself as an owner-manager of a small limited company, we can help you to decide the best way forward in the years ahead.
Further announcements from the Autumn Budget are now available for you to read here
For a free initial consultation, call our friendly and experienced team today on 01642 636200 or fill out our online enquiry form to outline your tax situation.
Last updated: 28th September 2022