Prime Minster breaks election manifesto promise, by announcing a 1.25% temporary increase to National Insurance Contributions and dividend tax rates from April 2022.
In a move away from the Conservative’s manifesto pledge to not raise taxes, the Prime Minster has declared that National Insurance Contributions will increase to help pay for the impact of the coronavirus pandemic on the NHS and our social care. A further announcement came in the increase to dividend tax rates to catch those individuals who trade via a limited company.
It is projected that the levy will generate £12bn additional income per annum, with the additional income being ringfenced to pay for health and social care including improving the NHS waiting list after Covid-19 and also paying for social care costs from 2024/25 onwards.
National Insurance Contributions (NIC)
From 1 April 2022, there will be a temporary 1.25% increase to employer, employee and self-employed NIC. The increase will also apply to class 1A (benefits in kind) and class 1B (PAYE settlement agreements) NIC. The increase will apply to the following:
• All employees earning above the class 1 primary threshold of £9,568;
• All self-employed individuals or partners in partnerships which earn above the lower profits limit of £9,568; and
• All employers where the employee earns above the class 1 secondary threshold of £8,840.
*All limits and thresholds are based on the 2021/22 tax year.
The government have not announced any changes to Class 1 secondary employer NIC reliefs or allowances including the £4,000 employment allowance, apprenticeship reliefs and the new employees in freeports.
From April 2023, NIC rates are anticipated to return to 2021/22 levels but the increase will still be in existence as a “health and social care levy” will be legislated. From this date, the legislation will also extend the new levy to apply to those individuals who exceed the state pension age but are still working, either via employment or self-employed. This move brings those who are currently exempt from paying NIC back into the system.
Dividend tax rates
It is common for a limited company to be used to pay directors a basic salary with their remuneration being topped up via a dividend. However, HMRC are aware that these individuals would not be caught by the increase, as the basic salary is normally set at the higher of the Class 1 primary or secondary threshold as a planning mechanism to escape paying NIC.
HMRC have therefore matched the increase in NIC contributions with a 1.25% increase in dividend tax rates from 1 April 2022. The £2,000 dividend tax allowance remains unchanged, whereby the first £2,000 of dividends are not subject to income tax.
The 1.25% increase will result in the following revised income tax rates:
• 8.75% for basic rate tax payers;
• 33.75% for higher rate tax payers; and
• 39.35% for additional rate tax payers.
This increase brings a second blow to Companies, following the previous announcement that corporation tax is set to rise to 25% with effect from April 2023.
Social Care Changes
The financing of social care in the UK, is set to change from October 2023, when the additional funds raised via these measures will be used directly to help fund the gap in our health and social care systems.
From October 2021, the government are introducing a cap of £86,000 on the amount an individual will contribute towards their personal care throughout their lifetime. Additionally, from October 2023 individuals with assets less than £20,000 will not make any contributions towards their personal care, a welcome increase from the previous limit of £14,000.
The Prime Minster has not ruled out any further tax increases at this stage. Making the next budget due on 27 October 2021 an eagerly anticipated one.