Major Changes to National Insurance and Dividend Tax from April 2022 - What Next?
The sheer magnitude of the COVID 19 pandemic, created the need for unmatched levels of state aid and financial support, while also creating incredible pressure and in turns back logs and inefficiencies in the Health and Social Care system. It was obvious at some point the government would have to begin to try and balance the books and address the issues left behind by pandemic, and this week they began to do this by announcing increases to both National Insurance and the tax on dividends.
The change to National Insurance contributions
National Insurance contributions will temporarily rise by 1.25 percentage points from April 2022. This increase will then be replaced by a separate health and social care levy from April 2023.
The 1.25 percent will apply to both employees AND employers, essentially amounting to a 2.5% increase in payroll taxes, as well as applying to the self employed
The new health and social care levy will become part of National Insurance contributions from April 2023 for all working people, even those over the state pension age. (Only those below the state pension age will pay this in the 22/23 tax year).
The government estimates typical basic-rate taxpayer earning £24,100 will contribute £180 in the 2022/23 tax year. Whereas a typical higher-rate taxpayer earning £67,100 will contribute £715 (source HL).
Additional-rate taxpayers make up just 2% of individuals affected, but will contribute nearly a fifth of the revenue raised.
Pre 2016, dividends were generally not liable to personal income tax, and as such made the "owner operated" Limited Company model significantly more attractive due to the lower overall tax and NI burden.
From 2016 however HMRC introduced the dividend tax, currently giving taxpayers a £2,000 Tax free allowance, while dividend income sitting in the basic rate band (up to £50,000) is taxed at 7.5%, and dividends sitting over and above the basic rate band taxed at 32.5% (with highest rate tax payers at 38.1 percent)
As part of the new scheme, from April 2022, basic-rate payers will now pay 8.75 per cent tax on dividends, up from 7.5 per cent, Higher-rate payers are now expected to pay 33.75 per cent, up from 32.5 per cent, and top-rate payers will pay 39.35 per cent up.
Analysts have described the increase as effectively a “last minute decision” but ties the dividend rate even closer to a “Pseudo National Insurance” which many have argued was why it was introduced in the first place.
Speculation continues that next in the Governments cross hairs is Capital Gains Tax and Inheritance Tax and we’ve already fielded queries from clients regarding possible impact of tax rises in these areas or cuts in allowances. These are relatively simple areas for the government to go after and if you have assets that could fall in to these areas we’re encouraging careful planning as early as possible.
As always we’re happy to discuss any of the above with clients should they require any further information of direct advice.