In September 2021, the Government announced the following changes:
- 1.25% rise in National Insurance Contributions (NIC) from April 2022 for employees, employers and the self-employed;
- From April 2023 onwards, the new Health & Social Care Levy (HSCL) becomes a separate tax on earned income with NIC rates returning to their current level;
- Workers over pension age who currently don’t pay NIC will have to pay the 1.25% levy;
- Tax rates on dividends will increase by 1.25% in April 2022.
What does the NIC increase and HSCL mean for employees & employers?
The temporary increase in NICs and its later replacement by the 1.25% levy means an extra:
- £130 a year for a worker earning £20,000 (£139 in employer NIC/HSCL)
- £255 a year for a worker earning £30,000 (£264 in employer NIC/HSCL)
- £505 a year for a worker earning £50,000 (£514 in employer NIC/HSCL)
- £880 a year for a worker earning £80,000 (£889 in employer NIC/HSCL)
- £1,130 a year for a worker earning £100,000 (£1,139 in employer NIC/HSCL)
For limited company contractors they will have to bear both the employee and employer NIC increase and the following tax year from April 2023, the replacement of that rise by the HSCL.
Existing reliefs on NIC, including the Employment Allowance, will also apply to the levy giving some mitigation for eligible employers.
What does the NIC increase and HSCL mean for the self-employed (sole traders and partners)?
People who are self-employed, running their own businesses as sole traders or in partnership will see their Class 4 NIC increase by 1.25% from 9% to 10.25% on profits between £9,569 and £50,270 and up from 2% to 3.25% on profits over £50,270 (2021/22 rates).
What does the dividend increase mean for shareholders?
The increase in the dividend tax rate, which is to be ringfenced for Health and Social Care applies from April 2022 and changes existing rates as follows:
- Dividend Allowance £2,000 - unchanged
- Basic Rate taxpayers - up from 7.5% to 8.75%
- Higher Rate taxpayers - up from 32.5% to 33.75%
- Additional Rate taxpayers - up from 38.1% to 39.35%
The increase applies to all manner of company dividends. Business owners, such as limited company contractors, able to determine the timing and amount of dividends payable from their companies should consider declaring dividends before the rise takes effect.
It’s worth pointing out that dividends will continue to be more attractive than salary as a means of taking profits from companies, especially for higher earners, despite the new levy and planned increase in corporation tax to 25% in 2023.
What does the new HSCL mean for workers over the state retirement age?
This group of people, forming an important part of the UK workforce with their skills and experience have hitherto not had to pay employee NICs (although employer contributions are still payable), or for the self-employed, the Class 4 NICs, after passing retirement age.
From April 2023 the new HSCL will be applied to their earnings.
What other options are available to mitigate these new changes?
- 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;
- Investors may want to look to maximise their Stocks & Shares and Pension ISAs because dividends contained within them aren’t liable to dividend tax.
