We are sure many of you will have heard in the last couple of days the news about the National Insurance Rise. What many may have missed, is that this is accompanied by a similar rise in dividend tax.
From 1 April 2022, there will be a temporary 1.25% increase in class 1 (paid by employees) and class 4 (paid by self-employed) national insurance contributions (NIC), as well as a 1.25% increase in the class 1 secondary NIC paid by employers.
This means that if you work as a sole trader, the amount of NI you pay will rise, and if you employ people, then both the amount you pay as an employer and the amount you withhold from the employee through payroll will increase.
From April 2023, this will be replaced with a separate “Health & Social Care Levy” and the NI rates will return to current levels.
In tandem with this increase, the rate of dividend tax will also increase by 1.25% from 1 April 2022, taking rates to: 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers and 39.35% for additional rate taxpayers. The only small concession is that the £2,000 dividend allowance will remain.
A summary of the changes is highlighted in the table below.
While this is a blow for all, dividends (combined with a modest salary below the Class 4 NI threshold) do remain a tax efficient way to drawing money from a limited company.
HM Treasury’s analysis of the impacts of the measures concludes that households with the highest 20% of incomes will contribute more than 40 times that of those with the lowest 20% of income, with more than one-third of the overall tax increases coming from the top 10% of households.
This analysis does now however include the impact of the increase to Employers NICs, stating “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, for example, and the distributional impact of each of these can vary. For this reason, we have excluded these impacts in the analysis”.
This revenue raising measure, which breaks the Conservative Government’s 2019 election manifesto, is being undertaken to contribute to the financing of social care in the UK, as part of reforms which include: capping the total amount any individual will pay towards personal care at £86,000; requiring no contribution at all from those with assets of below £20,000; and providing means-tested support for those with assets worth between £20,000 and £100,000.