2 increases were announced yesterday -NIC and dividend taxes are both increasing by 1.25% from April 2022.
For the first year, this will be collected as an increase in National Insurance.
But from April 2023, National Insurance will return to its current rate, and the extra tax will be collected as a new Health and Social Care Levy.
How will this affect you if you are self employed, an employee– or a limited company owner?
You currently pay 2 types of NIC – class 2 and class 4 NIC.
Class 2 NIC is a flat rate, currently £3.05 a week, or £158.60 a year. This is paid via self-assessment when you do your tax return, and is not affected by the new measures.
Class 4 NIC is charged on your profit and is currently 9% of profits over £9,568. If you have profits over £50,270 then you only pay 2% class 4 NIC on amounts over this. This is the rate that will go up to 10.25%, and then 3.25% from April 22.
Employees have NIC deducted from their salaries each month through their pay packet. There is no NIC due on the first £184 per week (£9,568 pa) and then NIC is payable at 12% on income between £184 and £967 per week (£9,568 – £50,284). Over this amount the rate reduces to 2%.
This rate will increase from 12% to 13.25% from April 22.
Currently you stop paying NIC once you reach state pension age. When this new amount of 1.25% moves from being called NIC and becomes the Health and Social Care Levy in April 23, this will be paid by state pensioners who are still working.
Employers pay employers NIC on employee’s salary. Currently there is no employers NIC on the first £170 per week (£8,840 pa). After this, employers NIC is paid at the rate of 13.8%, with no upper limit. This rate will increase to 15.05% from April 22.
If a company has more than one employee on their payroll earning over the NI threshold, they can currently claim the NIC Employment Allowance. This gives them a credit of up to £4,000 against their employers NIC bill and is claimed via the payroll each month.
Nothing has been said about the employment allowance in connection with the increase in NIC – presumably a company will still be able to claim the allowance while the increase is called NIC – but when it changes to the Health and Social Care Levy………………….?
Many small business owners choose to set their own salaries at £8,840 pa so that there is no NIC payable by either the employee or the employer, and their salaries will therefore not be affected by the increase in NIC. This is why the dividend tax has been increased as well!
Dividends are paid to shareholders of limited companies and are often the way that company directors will take money out of their companies. There is no NIC on a dividend, and hence it is an efficient way to pay yourself from your company.
Dividend tax is currently 7.5% for basic rate taxpayers, and 32.5% for higher rate taxpayers.
These rates will rise to 8.75% and 33.75% respectively from April 22.
As there is no NIC on a dividend, it is argued that increasing the tax on dividends at the same rate brings about some equality in the increases between the employed and the self-employed. Company directors I am sure will be asking where the equality was in the covid help given out by the government in the last 18 months!
The dividend allowance of £2,000 remains, and any investments held in ISA’s are tax free so will also not be affected by this increase in dividend tax.
As this has just been announced there is limited information available at the moment so the above is produced on what we now know. We will of course be updating you with new information as we get it!