The Government recently announced that National Insurance Contributions are going up by 1.25%. That means from 6 April 2022 everyone in employment or self-employment will pay an extra 1.25% on earnings above £9,568.
As an employer, you will also pay an additional 1.25% on your Employers National Insurance bill increasing this rate to 15.05%. This rate will also apply to any employee benefits reported on P11Ds at the end of the tax year, so if your employees are lucky enough to receive benefits such as cars or medical insurance that will also cost you as an employer an additional 1.25%.
From 6 April 2023, the National Insurance rates return to current levels, the additional 1.25% mentioned above will then be a separate line in your payroll records and on payslips called the ‘Health and Social Care Levy’. This sounds very much like a permanent change and our various software packages will need to be updated to reflect it. This can be offset against your employment allowance along with your employers National Insurance so you may not feel a difference if you are a small employer.
Another change that has had much less mention in the press is the change to the dividend tax rates also coming into force from the 2022/23 tax year. These are also all going up by 1.25%. This means the dividend tax rates are going to take a bit of remembering as they change to 8.75%, 33.75% and 39.35%. Still lower than income tax rates but sneaking up all the time. Unlike the National Insurance changes this will affect all individual shareholders not just working people (plenty of retired people have dividend income), subject to their dividend income exceeding the dividend allowance.
A secondary consequence of this change is that the (refundable) tax paid alongside the corporation tax on an outstanding director’s loan account (s.455 tax) will also increase from 32.5% to 33.75%.
If you are a director/shareholder there is a lot to be done around remuneration/dividend planning. This could not only save employees National Insurance but also employers’ National insurance. This does have to be weighed up with the tax savings companies receive on payment of employee remuneration, but there can often be savings available.
If you are a sole trader or in a partnership, consider whether there is a possibility of accelerating some of your trading income in your accounts that are taxed in 2021/22 to avoid the increase in National Insurance in the following tax year. There are a number of factors to consider in such planning.
Also, if you have control over when dividends are paid from a company, you may wish to consider paying some dividends earlier so that they fall into the 2021/22 tax year instead of 2022/23.
The caveat to all of these planning options is that accelerating income to benefit from the (lower) tax/NIC rates may have cashflow implications and attention will need to be given to relevant tax rate thresholds.
If you’d like further information on any subjects discussed in this article, please don’t hesitate to get in touch via the form below.
In our October newsletter, we focus on: our predictions for tax changes in anticipation of the upcoming autumn budget, the changes coming into effect around NIC and dividend tax rates, the importance to SME businesses in evaluating their supply chains, an outlook on the UK and global economies and how family vendor assisted management buyouts work.
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