Whether you’re an employer, employee or self-employed, the recent changes applied to National Insurance (NI) and Dividends could affect you so it’s important you’re in the know…
National Insurance was introduced as a tax in 1911 and is paid by employers, employees and self-employed individuals. Its original purpose was to provide funds for those who had lost their jobs or needed medical treatment. It is currently a ring-fenced form of income allocated to the NHS, Benefits and State Pensions, with the flexibility for the Government to borrow from this fund to pay for other projects.
From April 2022 a new temporary higher rate of NI was introduced for the 22/23 tax year, which will then be reclassified as a new tax levy which will be taken alongside the original (pre-April 2022) NI rates from April 2023.
The April 2022 increase means that employers, employees and self-employed will pay an additional 1.25% on their NI contributions. This is applied to Class 1 NI – Employees, Class 4 NI – Self-employed and Classes 1A and 1B – Employers.
If your earnings are below the NI threshold, then your situation will not change as the new levy won’t apply to lower earnings either.
The Government’s aim is for a proportion of this tax increase to be used to support the social care system, enabling individuals to pay no more than £86K for care costs (excluding food and accommodation) from October 2023.
So, let’s break this down into what to expect….
The additional levy will of course increase your salary bill as you will be required to pay more NI for employees who qualify, and any new staff will come under the new increased rate too. This could impact the salaries employers can offer, cashflow, profit margins and more.
HM Treasury stated: “Whether, how and when employers will pass on the impact of this is unclear, particularly in the short run; businesses may choose to adjust wages, prices or profits.”
Anyone who earns enough to qualify for NI contributions will see an increase in their payments on their wage slips. As an example, due to the percentage brackets that apply to NI payments, someone earning £100K / annum will see a 19% increase in their NI payments, compared to someone earning £20K / annum who will see a 10% increase. Depending on individual circumstances, it may be worth considering a salary sacrifice scheme for pension contributions to reduce NI payments.
It is expected that the self-employed sector will feel the impact of this increase more than most. As an example, someone earning £29K / annum will see an NI increase from £1097.48 to £1227.88
Dividend tax has also been increased by 1.25% from April 2022. This will have the biggest impact on directors and shareholders who choose to adopt the high dividend, low salary approach, but will apply to anyone who receives dividends outside of a stocks and shares ISA.
What happens after the 1-year rate increase?
After the 1-year NI rate increase, the additional 1.25% will be collected separately from NI payments, classified under a new ‘Health and Social Care levy’ from April 2023. Unlike NI, this new levy will also be paid by state pensioners in addition to all working adults.
Phil Hall, AAT’s Head of public Affairs and Public policy stated: “The levy will also apply to individuals working above state pension age, but rather than ending NIC exemptions for workings pensioners (as AAT has repeatedly recommended) they will only pay 1.25% and continue to enjoy an NICs exemption, which is largely unjustifiable.”
At this time, it is uncertain if the dividend tax increase will be removed from April 2023, so for now we are advising our clients to assume it will remain in place.
As always, with all things tax related, we’re here to help! Our expert tax team can offer advice and guidance to help you plan for this rate increase. Just give us a call, and let’s talk tax.
By Michelle Morris on 26/05/2022 12:00:00