How the Dividend Tax and National Insurance increases could affect you, and how to prepare for them
The new tax year has just begun, and with it has come a set of changes that will likely affect you and your business.
In September 2021, the government announced a change to both Dividend Tax and National Insurance contributions (NICs), which came into immediate effect on 6 April 2022.
These changes see both Dividend Tax and NICs increase by 1.25 percentage points, meaning that as an employee, company director, or business owner, your wealth will be directly affected.
However, in a surprise announcement during his spring statement, the chancellor Rishi Sunak revealed an increase to the threshold at which individuals start paying NICs.
So, although the rate of NICs has increased, many lower-earning Brits will pay less NICs overall.
You could be concerned about how your earnings may be adversely affected by the rise in Dividend Tax and NICs, and how your company might fare with the additional NICs burden as we emerge from the pandemic.
Read on for everything you need to know about how these policy changes could affect your wealth in the coming years.
Dividend Tax rose on 6 April 2022
Dividend Tax rates increased by 1.25 percentage points on 6 April 2022. This change will mostly affect investors and business owners.
As a director or entrepreneur, you might take dividends as part of your remuneration, in order to mitigate the amount of Income Tax you pay.
You may also receive dividends from shares you hold.
Although a 1.25 percentage point rise in Dividend Tax might sound incremental, it comes alongside a simultaneous increase to NICs, and an additional rise in Corporation Tax that is set to come into effect in 2023.
The below table compares the Dividend Tax rates in the 2021/22 tax year, and from the 2022/23 tax year onwards.
|
Tax band |
Dividend Tax rate 2021/22 |
New Dividend Tax rate from 2022/23 |
|
Basic rate |
7.5% |
8.75% |
|
Higher rate |
32.5% |
33.75% |
|
Additional rate |
38.1% |
39.35% |
Source: FTAdviser
If you take home more than £2,000 a year in dividends, you will face a slightly higher bill from now on regardless of your Income Tax band.
For example, if you’re a higher-rate taxpayer taking £40,000 in dividend payments then you will now pay 33.75% on £38,000 of dividends. This would result in a Dividend Tax bill of £12,825, up £475 from the 2021/22 tax year.
The new “Health and Social Care Levy” increased your National Insurance contributions from 6 April
In his spring statement, the chancellor confirmed that the proposed 1.25 percentage point increase in NICs would go ahead from 6 April 2022 as planned.
This additional contribution will then become a “Health and Social Care Levy” from April 2023 and will appear as a separate deduction on payslips.
The 1.25 percentage point increase also applies to employers, meaning that if you run a business, your personal and corporate wealth will both bear this change.
The chancellor raised the National Insurance (NI) threshold in his spring statement
Although the 1.25 percentage point rise in NICs could be of concern to you, the chancellor also announced a change to the NI threshold that could lessen your worries.
Rishi Sunak unveiled a surprise increase in the National Insurance Primary Limit and the Lower Profits limit, for the employed and self-employed respectively. The limit will jump from £9,880 to £12,570 in July 2022.
This change means that Brits will be able to earn £12,570 a year without paying any Income Tax or NICs.
As a result, the Treasury say that a typical employee will save £330 a year, and around 70% of UK workers will pay less NICs in the coming year, even accounting for the new Health and Social Care levy.
However, if you are a higher earner, you will still pay more NICs in 2022/23 than you did in 2021/22. The Guardian reports that someone earning £60,000 a year will see their take-home pay fall by £232 a year from July 2022.
National Insurance will be levied on working pensioners for the first time in 2023
Around 1 million working pensioners will pay NICs on their earnings for the very first time from 2023.
Under the current system, taxpayers stop making NICs when they reach 66 and begin receiving the State Pension.
However, under this latest reform, a working pensioner earning £60,000 a year will go from paying nothing to paying £630 a year in National Insurance, on top of Income Tax.
If this reform applies to you, you can expect to pay National Insurance at a rate of 1.25% from April 2023.
Even considering the increased NI thresholds announced in the spring statement, many pensioners will still pay NICs on their earnings for the first time. While this does not come into effect for 12 months, it may be wise to work with your financial planner in order to prepare for the change.
Pension contributions could be a viable alternative remuneration strategy
If you take dividends as part of your remuneration, you could be concerned about how this 1.25 percentage point rise might affect your personal wealth over time.
While taking dividends is still likely to be a more tax-efficient remuneration strategy than solely drawing a salary, you will pay higher tax on your dividends in the coming years. In light of this change, you could be searching for alternative ways to maximise your earnings.
One such way is by making pension contributions. Currently, a company can make contributions to personal pension plans for a business owner. Any employer pension contributions made “wholly and exclusively for the purposes of the business” can receive both Corporation Tax and National Insurance relief.
In 2022/23 that is a 15.05% National Insurance saving, which you could redirect to your pension pot. And, with Corporation Tax set to rise sharply for many businesses from April 2023, there could be even more convincing reasons to consider this approach.
Similarly, you may be looking for ways to reduce the amount of NICs you pay. One way could be to consider additional pension contributions through a “salary sacrifice” arrangement.
Under a salary sacrifice arrangement, you give up part of your salary or bonus and, instead, your employer pays this amount directly into your pension. This is different from the normal “net pay” system where your contributions are deducted from your pay before your salary is taxed.
While your pension payments are free from Income Tax (or are eligible for pension tax relief if they are paid after Income Tax), they are usually subject to NICs. However, if you pay pension contributions through salary sacrifice, they do not form part of your pay and are free from National Insurance charges.
This benefits you as you pay less NICs. It benefits your employer too, as they also pay less NICs. Indeed, some employers will redirect the NICs savings they make into your pension as an additional perk.
Of course, you should remember that your pension fund won’t be accessible until you are 55, or 57 if you retire after 2028. So, if you choose to reallocate some of your remuneration to your pension, you need to be able to afford to “sacrifice” the sum you contribute to your pension until then.
Additionally, using salary sacrifice can reduce your borrowing potential when you apply for a mortgage, or reduce the value of other perks, such as “death in service” benefit.
Get in touch
If your wealth will be affected by the Dividend Tax and NIC changes in the current and future tax years, now is the time to get in touch with us.
We can help you to build your wealth tax-efficiently and create a financial plan to help you achieve your life goals.
Email us at hale@kelland.co.uk, or call 0161 929 8838.
Please note
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.