Making Sense of Rises to National Insurance and Dividend Tax Rates

We are sure that many of you are wondering how the government’s announcement in relation to the increased funding for health and social care will impact you financially. We’ve put together some notes making sense of rises to National Insurance and dividend tax rates.

Rises to National Insurance and Dividend Tax Rates

The increases in the cost of National Insurance from 6 April 2022 will affect employers, employees and the self-employed. Additionally, the rate of tax for those who receive dividends is to increase from the same date.

In broad terms:

  • National Insurance (NI) will rise by 1.25% from April 2022. This increase will apply to both employee and employer contributions.
  • From April 2023, this extra payment will become a separate tax – called the Health and Social Care Levy – on earned income. It will show up separately on payslips.
  • The levy – unlike NI – will also be paid by people who continue to work beyond retirement age.
  • Company shareholders will also have to pay 1.25% more in tax on the dividends they receive.

Example effect of the Rises to National Insurance and Dividend Tax Rates

In 2022/23, a typical basic rate taxpayer earning the median basic rate taxpayer’s income of £24,100 would be expected to pay an additional £180.

In 2022/23 a typical higher rate taxpayer earning the median higher rate taxpayer’s income of £67,100 would be expected to pay an additional £715.

From 2023/24, whilst the Levy will be a new tax, it will be paid by employed and self-employed individuals and partners earning above the Primary Threshold/Lower Profits Limit (currently £9,568) which apply for national insurance calculations. This means it will produce the same charges as would be the case if the national insurance rates remained at the higher levels.

Employers

Employers will pay the Levy for employees earning above the Secondary Threshold.

Reliefs will still apply for employers of apprentices under the age of 25, all employees under the age of 21, veterans and new employees in Freeports from April 2022.

Dividends

Basic Rate Higher Rate Additional Rate
2021/22 dividend rates 7.5% 32.5% 38.1%
2022/23 dividend rates 8.75% 33.75% 39.35%

 

It is not clear whether the increase in the dividend rates will only apply to individuals or, for example, whether any trusts which receive dividends will also be required to pay the additional rates.

How will this change the current system of health care?

What we know so far is that:

  • People will no longer pay any more than £86,000 in care costs – that is, for actual care, rather than accommodation – over their lifetime, from October 2023
  • Those with less than £20,000 in assets will have their care fully paid for
  • There will be help for people owning between £20,000 and £100,000 in assets; and
  • The amount of help given will be based on a means test, with the details of how this will work yet to be announced.

What do we think?

The changes are a further increase to employer costs and the typical headline rate will now be 18.55% (15.05% NI plus 3% minimum auto-enrolment pension contributions plus 0.5% apprenticeship levy (for payrolls in excess of £3m)).

The increase will be tough for many employers and will contribute to price inflation for those who feel able to pass on the cost.

Salary sacrifice arrangements in relation to pension contributions and other government approved benefits will become more attractive, especially since they can give savings in both employer and employee national insurance contributions.

We will keep you updated as more information becomes available but, in the meantime, if you do have any queries, please do contact our specialist Tax Technical Team on 01253 874 255.

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