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Changes to National Insurance and Dividend Tax – what do they mean for SME’s?

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Earlier this month, the government announced increases in National Insurance contributions and dividend tax to fund wide-ranging reforms to social care and the NHS. Here, we look at what exactly these changes mean for the UK SME’s.

Changes to National Insurance Contributions

The Government have announced a 1.25% increase on National Insurance Contributions (NIC) for employers, employees and the self-employed for the 2022/23 tax year.

Another policy change was announced which will affect working pensioners over the age of 66. So far, taxpayers stopped paying National Insurance Contributions once they reach the age of 66 at which point the state pension kicks in. From 2023, these pensioners will start having to pay a 1.25% contribution on their earnings.

From April 2023, a separate health and social care tax will be introduced. Proceeds raised from this tax will go towards reforming the social care sector, an area that – as we all know – has come under intense pressure during the Pandemic.

How will they affect business owners?

Currently, employers’ secondary Class 1 National Insurance Contributions are fixed at a flat rate of 13.8% for employees earning more than £8,840 a year. This will increase to 15.05% from 6th April 2022.

Once the new health and social care tax at 1.25% is introduced in April 2023, the flat rate will revert back to 13.8%.

How will they affect employees?

Employees earning more than £8,840 per year currently automatically have 12% of their earnings deducted from their pay packets for their class 1 National Insurance contributions. This goes up by another 2% for higher rate tax payers i.e. employees with an annual income of over £50,270.

These contributions will increase to 13.25% and 3.25% respectively from April 2022.

EmployeeCurrent contributionFuture contribution
Basic tax rate (income between £8,840 and £50,270)12%13.25%
Higher tax rate (income above £50,270)12% + 2%13.25% + 3.25%

How will they affect the self-employed?

The self-employed currently pay class 4 National Insurance Contributions.

Self-employedCurrent contributionFuture contribution
Basic tax rate9%10.25%
Higher tax rate9% + 2%10.25% + 3.25%

Please note that the increase does not apply to Class 2 National Insurance Contributions – the flat rate paid by the self-employed with profits above the small-profits threshold, currently £6,515 a year. Neither does it apply to Class 3 National Insurance Contributions.

Changes to dividend tax

Company directors and shareholders who get paid via dividends on the company’s profits are facing a higher tax bill on those dividends from April 2023. The increases apply to payments above the £2,000 tax-free dividend allowance.

 Current taxFuture tax
Basic tax rate7.5%8.75%
Higher tax rate32%33.75%
Additional tax rate38.1%39.35%

Key takeaways

  • The increase in NICs applies to employers as well as employees, so businesses need to budget for these additional employer’s NI costs from April 2022 onwards.
  • Existing reliefs on NICs, including the employment allowance, will also apply to the levy, as do the reliefs for employers of apprentices, newly employed veterans and new employees in freeports.
  • Business owners may want to bring forward planned dividends before the 1.25% tax rise takes effect in April 2022.
  • Dividends will continue to be more attractive than salary as a means of taking profits from companies, especially for higher earners, despite the planned increase in corporation tax to 25% in 2023.
  • Employers may want to look at share option schemes rather than bonuses for higher earners.
  • Salary sacrifice could become an even more tax efficient way of making pension contributions, as this reduces the salary on which employee and employer NICs are paid.
  • Company owners to look at alternative ways of extracting profits from the business that do not attract NI.

In summary

In short, the changes announced will affect the vast majority of SME’s. A tax hike – despite going against the Conservative Government manifesto – was to be expected following the Government support packages available to deal with the Coronavirus pandemic.

Please get in touch with your usual HF contact to discuss any implications for your business and how these may be mitigated.

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