The Prime Minister announced on 7th September that the government will introduce a new 1.25% Levy to provide an extra £12 bn a year to support the NHS and social care.
From April 2022 it is proposed that there will be a 1.25% rise in National Insurance Contributions (NICs) to be paid by both employers and workers. This will then become a separate Levy on earned income from 2023/24 – calculated in the same way as NIC and appearing on an employee’s payslip.
Note that the 1.25% increase also applies to the Class 4 contributions paid by the self-employed on their profits. The Class 1 NI contributions paid by employees increase to 13.25% of earnings above £9,568 and the self-employed rate increases to 10.25%. The 3% differential remains for the time being, although there are rumours that the rates will align in the future. Above £50,270 in earnings or profits, the rate will be 3.25%.
The employers Class 1 NIC rate will increase from 13.8% to 15.05% from 6 April 2022, however, many small businesses are able to set off the £4,000 employment allowance against their employers NIC liability. Many workers operating through personal service companies to whom the new “off-payroll” working rules apply will also be caught by the proposed measures.
DIVIDEND TAX RATES ALSO INCREASING FROM 2022/23
It is also proposed that there will be a 1.25% increase in the rate of tax payable on dividends received by those who own shares in companies. This would mean that after the £2,000 tax free dividend allowance the rate of tax would be 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers and 39.35% for those with income in excess of £150,000 a year. This will catch many family company director/shareholders who traditionally “pay” themselves by taking a low salary and larger dividends to minimise NICs.
PLANNING ACTIONS BEFORE THE NEW RATES COMMENCE
The announcement of the proposed changes more than six months before they take effect means that there is time to reduce the impact. Employees could consider agreeing on a salary sacrifice arrangement with their employer, for example sacrificing their £5,000 annual bonus for an additional pension contribution paid by their employer. Such an arrangement would save 1.25% NICs for both employee and employer as well as £2,000 income tax where the employee is a higher rate taxpayer.
Employees might also consider a salary sacrifice in favour of an electric company car.
Shareholder/directors of family companies could consider bringing forward dividend payments to before 6 April 2022. Such a strategy needs careful planning as if the extra dividend takes the taxpayer’s income above £50,270 the excess would be taxable at the 32.5% rate instead of the 7.5% rate and the planning could backfire.
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