The Government has this week announced its plans to reform health and social care, and how these new plans will be paid for – breaking its 2019 election promise not to increase Income Tax, National Insurance or VAT. The headline is an effective 1.25% increase in National Insurance Contributions (NIC) from April 2022 which will be replaced with a new Levy, from April 2023, ring-fenced purely for health and social care costs. This increase will be extended to workers over state pension age who do not usually pay National Insurance. From April 2022 there will also be an increase of 1.25% on the rates of tax applied to dividends. Although technically this increase is a separate levy, it will be based on the current NIC rules, and so for ease we have combined the two to show the increase. From 2023, this levy will be separately identifiable on payslips and other related documentation.
For self-employed individuals, the increase is quite simple. From 6 April 2022, instead of paying 9% NIC on profits between £9,568 and £50,270, they will instead pay 10.25%. Profits over £50,270 will be liable to NIC at 3.25% instead of 2%. This does mean that those with the highest income will be proportionally more affected. Someone with profits of £40,000 will pay £2,474.68 instead of £2,094.28, an extra £380.40, whereas someone with profits of £80,000 will pay £5,138.18 instead of £4,257.78, an increase of £880.40.
Employees will be hit by the 1.25% levy from April 2022. The first £9,568 of income remains NIC-free, but income above that and up to £50,270 will be liable at 13.25% instead of 12%. Income above this limit will be liable at 3.25% instead of 2%. This means an employee earning £40,000 will pay £4,032.24 instead of £3,651.84, again an extra £380.40. An employee earning £80,000 would pay £6,359.24 instead of £5,478.84, once again an extra £880.40. This will initially only apply to those below state pension age, but it will be extended to those over state pension age from April 2023.
Employers will also be hit by the 1.25% levy from April 2022, increasing the cost of employing people, taking rates from 13.8% to 15.05%. For many small businesses relief may come in the form of the Employment Allowance, where eligible employers can reduce their National Insurance liability by up to £4,000 per year and if their NIC liability for the year remains below £4,000 the new rules will not affect them. Eligibility criteria apply to this allowance, but it can easily be overlooked, so it is important to check.
Limited companies receive Corporation Tax relief (currently 19%) on NIC paid as an employer so, after tax, the cost of the increase will only actually be 1.0125%. From April 2023, if the rate of corporation tax applicable to your company is 25%, the additional cost reduces to 0.9375%. The new rates will also apply to Class 1A NIC due on benefits in kind.
Sole traders and partnerships will also receive tax relief on the additional employer contributions they have to pay, as these payments will reduce their taxable profits. The amount of effective saving will depend on your rate of tax.
Owner Managed Companies
Company owners who receive a salary of more than £9,568 could be hit with a double whammy by this increase, as they may have to pay both employer’s and employee’s NIC.
From April 2022, the rates of tax applied to dividends will also increase following this week’s announcements. Rates of tax on dividends will be as follows:
• 8.75% (currently 7.5%) where total income is up to £50,270; and above this
• 33.75% (currently 32.5%) where total income is up £150,000; and
• 39.35% (currently 38.1%) where total income is above £150,000.
This means a company owner keeping their total income below the higher rate threshold of £50,270 (for example, salary £9,568 and dividends of £40,702) will pay an extra £446.25 tax on their dividends, increasing from £2,677.50 to £3,123.75. Alternatively, someone on the same level of total income but consisting of £20,000 salary and £30,270 dividends, would pay an additional £130.40 NIC from April 2022 (plus potentially more employer contributions too), plus an increase in dividend tax of £446.25. This would make them £576.65 per year worse off.