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National Insurance, Dividend Tax, and the Key Finance Changes to Business Owners 2022

On the 9th September the UK government followed up on its pledge to “fix the crisis in social care once and for all” by publishing its Health and Social Care Levy policy paper. This represents a major change in taxation and is intended to fund health and social care spending in the United Kingdom. The changes will affect businesses and individuals of all ages and come into effect in April 2022.

Tax increase 2022

The levy is a 1.25% tax on earnings for employees, the self-employed and employers while the taxes paid on dividends will also rise by 1.25% at the same time.

The Health and Social Care Levy itself doesn’t come into effect until April 2023, however, a temporary change to the UK’s taxation scheme will come into effect in April 2022 which mirrors its impact.

This temporary tax increase in 2022 is designed to circumvent the administrative limits imposed on HMRC, preventing its ability to introduce an entirely new tax in time for April 2022.

It is estimated that the government will raise an average of £12bn per year through this new taxation scheme. The majority of this amount comes from the levy (£11.4bn) with £0.4bn arising through the rise in the dividend tax rate.

What happens when?

From April 2022 employees and employers will pay an increased amount in Nation Insurance Contributions (NIC), +1.25%.

In April 2023 the Health and Social Care Levy will be applied (+1.25%) and the amount of National Insurance Contribution will be reduced (-1.25%).

The net change in April 2023 acts to preserve the tax increase made in April 2022.

For illustration see the table below.

Class 1

Class 2

Employee

Employer

Self Employed

Current NIC Rates

2021

12%

13.8%

9%

Temporary NIC Rates

2022

13.25%

15.05%

10.25%

NICs rates - NIC

2023

12%

13.8%

9%

NICs rates - Levy

2023

1.25%

1.25%

1.25%

The new levy will then apply to any earnings or profits above the National Insurance thresholds in the future. These thresholds are determined by the Chancellor of the Exchequer and announced in the annual budget.

But what about dividends?

Alongside the new Health and Social Care Levy, the government also announced a 1.25% increase on top of the taxes paid on dividend income. This change also comes into effect in April 2022.

Other forms of income, however, such as pensions and property will be unaffected.

Speaking of pensioners…those who have reached the state pension age and have stopped paying National Insurance Contributions will be exposed to the introduction of the 1.25% levy in 2023. The temporary change in April 2022 will not impact those above the state pension age.

What this means for you

For example, the 1.25% increase on NIC will see an employee, paid a salary of £20,000 a year, pay an extra £130.

A worker on a salary of £30,000 a year will pay an extra £255 on top of what they already pay in NIC.

For someone on £50,000, the extra NIC will be £505.

Currently, only those that are required to pay National Insurance will need to pay the extra tax. So, any individuals earning under £9,564 (who currently don’t pay any NIC) will be unaffected by the temporary change or the levy.

If you also earn an income through share dividends, this will be taxed at the current basic rate (7.5%) plus 1.25%.

Tax on dividends is paid if you earn over £2,000 in a tax year. For example, if you received £5,000 of dividend income as a basic rate taxpayer, the rise to 8.75% would cost you an additional £37.50 per year.

What this means for your business

Businesses should use the months up to April 2022 to assess the likely implications of both the proposed NIC increases and the Health and Social Care Levy for their employees.

Points to consider include:

  • The effect of the expected 1.25% increase on budgeted or projected labour costs from April 2022.
  • The potential effect on workforce elements that are internationally mobile.

Employers should consider communicating these changes to all their employees and highlighting their potential overall impact and likely consequences.

To summarise

As with any major change to taxation, the implications can be far from straightforward. In this case, there are consequences for both employees and employers of all ages. These changes may have a material impact on a business and it’s important that these are mitigated against and planned for. Seeking professional financial advice from accountants and other business experts can be vital to ensure the financial health of the business is protected.

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