Changes to NI & Dividend rates – what’s it all about?
Let’s start at the beginning…
National Insurance (NI) was introduced as a tax back in 1911. Its purpose was originally to assist those who had lost their jobs or needed medical treatment. Currently, NI is paid into a ring-fenced fund that can be used to pay the NHS, benefits and state pensions. NI is paid by employers, employees and the self-employed at varying rates depending on earnings.
So, what’s changing?
From April 2022, National Insurance Contributions (NICs) will increase for 1 tax year before it is reclassified, and a new tax levy is introduced alongside the original rates. The rate will increase by 1.25% on all Class 1 (employees), Class 2 (self-employed) and Class 1A and 1B (employers). Those within working age and earning less than the primary NI threshold don’t have to pay NI or the new levy.
What are the consequences of these changes?
For employers, this increase could directly impact their current salary bills and any new recruits depending on how much individuals are earning. It could result in a larger NI payment per employee, funds for which the employer must somehow find. This could see a knock-on impact on salaries paid, cost of goods / services and profit margins for many companies.
The dividend tax is also set to increase from April 2022. This will impact anyone holding investments outside of a stocks and shares ISA, investors who have exceeded their dividend tax allowance and individuals who pay themselves dividends from their own business. This most likely to be affected will be directors / shareholders who choose to receive a low salary but take payment from their company in dividends.
ISAs will remain ‘tax free’ with an allowance of £20,000 / year for an adult and £9,000 / year for a junior ISA.
What happens in April 2023?
After a year of the temporary increased rates, NI will return to its previous rates in April 2023 (the same as tax year 2020/2021) and the additional 1.25% that had been collected as additional tax will be classified as a new ‘Health and Social Care Levy’.
The new levy will work differently from NICs and will be paid by all working adults, including those who are still working and over state pension age.
It is yet to be confirmed if the dividend rate will return to its original amount in 2023.
HM Treasury stated, “Whether, how and when employers will pass on the impact of this is unclear, particularly in the short run; businesses may choose to adjust wages, prices or profits.”
Phil Hal, AAT’s head of Public Affairs and Public policy stated, “It’s also worth highlighting that a NICs rise for employers at a time when many are still facing staff and material shortages, and associated cost increases is likely to slow the UK’s economic recovery.”
If you need any help or advice regarding any of these planned changes, the team at Ellacott Morris are here to help.
By Michelle Morris on 27/10/2021 11:00:00