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Changes to National Insurance and dividend tax rates

Posted on 16th September 2021

Last week the commons approved Boris Johnson’s proposal to increase National Insurance. This is a double whammy for business owners as the rate of corporate tax is set to increase in April 2023 to 25% for companies with profits over £250,000. Companies with profits of £50,000 or less will continue to pay the corporate tax rate of 19% and for those companies with profits ranging between £50,000 and £250,000 will pay a marginal rate of tax as detailed here.

What are the changes? Government Guidance:

National Insurance contributions (NICs) will increase by 1.25% for one year only for employees, employers and the self-employed from April 2022. This will cover both Class 1 (employee and employer), Class 1A and 1B and Class 4 (self-employed) NICs. Those above State Pension Age are not impacted by the April 2022 changes.

From April 2023, a new ringfenced Health and Social Care Levy of 1.25% will be introduced which will apply to those who pay Class 1 (employee and employer), Class 1A and 1B and Class 4 (self-employed) NICs and will also be extended to those over State Pension age who are in work. When the new levy comes into effect, National Insurance rates will revert back to current levels.

The levy will also apply to individuals above State Pension age with employment income or profits from self-employment above £9,568. The levy will be administered by HMRC and collected through the current reporting and collection procedures for NICs – Pay As You Earn and Income Tax Self-Assessment.

Like National Insurance, levy contributions will apply UK-wide, people will pay the same in England, Scotland, Wales and Northern Ireland.

From 2023-24, levy contributions will need to appear as a separate item on payslips. Where possible a generic message should be included payslips for the next tax year (2022-23). More information on payslip requirements will be available in due course.

The government will also increase by 1.25% from April 2022 the rate of income tax which is paid by people who receive dividend income from shares.

What is the difference for me?

The example below illustrates the additional tax burden for a limited company with £300,000 profits and a sole director taking £100,000 of dividends from the company both before and after April 2023.

BEFORE APRIL 2023	£		AFTER APRIL 2023	£
Taxable profit	£300,000		Taxable profit	£300,000

Corporation tax @ 19%	£57,000		Corporation tax @ 25%	£75,000

Dividends	£100,000		Dividends	£100,000
Personal allowance	-£12,570		Personal allowance	-£12,570
Taxable income	£87,430		Taxable income	£87,430

Income tax			Income tax
£2,000 dividend allowance	£0		£2,000 dividend allowance	£0
£35,700 @ 7.5%	£2,678		£35,700 @ 8.25%	£2,945
£49,730 @ 32.5%	£16,162		£49,730 @ 33.75%	£16,784

Total income tax and employees NIC		£18,840	Total income tax and employees NIC		£19,729
Total tax burden		£66,340	Total tax burden		£94,729

How can I plan for these changes?

As the rate of dividend tax increases from April 2022, it may be of value to consider taking a higher dividend in the current tax year (2021-22). In addition, salary and pensions are deductible expenses for corporate tax purposes and therefore considering remuneration planning for both directors, key staff and the employee population is incredibly important going forward.

Tax efficient benefits should also be considered, such as life insurance and electric company vehicles, as these can also reduce the taxable profit in a corporate structure.

By reducing a dividend to £80,000 and having a £20,000 pension contribution made by the company on behalf of the director, the total profit withdrawal by the director remains the same but the overall tax burden is reduced by £19,251 as the below illustrates:

AFTER APRIL 2023	£
Taxable profit (300,000 reduced by pension contribution of 50,000)	250,000

Corporation tax @ 25%	62,500

Dividends	80,000
Personal allowance	-12,570
Taxable income	67,430

Income tax
2,000 dividend allowance	0
35,700 @ 8.25%	2,945
29,730 @ 33.75%	10,033

Total income tax and employees NIC		12,978
Total tax burden		75,478

Please contact the relevant individual at Fuller Spurling to discuss how to mitigate your tax bill before these changes impact you and your business.

Questions or queries?

Please do let us know if you have any questions or if you need any further help understanding the regulations. – please call us on 01932 564098 or message us here.

Information correct at time of publication

This article was produced in September 2021 – please always check with Fuller Spurling that information is current, up to date and applicable to your situation.

Tagged as: Dividend Tax Rates, NIC, self-employed

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