Additional National Insurance Contributions for employees and an increase in corporate and dividend tax

From April 2022, the UK Government plans to create a new social care levy which will see UK-wide tax and National Insurance Contribution (NICs) increases. There will be a 1.25% increase in NICs on earned income, with dividend tax rates also increasing by 1.25%. The money raised will be ringfenced for health and social care costs.

The levy will be a new tax and separate from NICs, but it will take some time for HMRC to update their IT systems. Initially the funds will be raised by increasing the NICs rates. Once HMRC systems have been updated, a new surcharge of 1.25% will replace the increase in NICs rates and will also apply to those working above State Pension age of 67.

How much extra employees have to pay?

The Health and Social Care Levy will apply to employees and employers liable for Class 1 NICs and to self-employed individuals liable for Class 4 NICs.

For an average basic rate employee earning £20,000 per annum, they will contribute an additional £130 a year. Meanwhile a typical higher rate employee earning £80,000 per annum will pay a further £880 a year.

The NIC increase will also apply to employers as well, who will pay an additional 1.25% in employer NIC’s from April 2022. Employers will have to pay the levy for employees earning above the Secondary Threshold of National Insurance, which is £8,840 in 2021-22. Existing reliefs will continue to apply for employers of apprentices under the age of 25, all employees under the age of 21, armed services veterans and new employees in Freeports from April 2022.

The Health and Social Care Levy will become a separate tax on earned income from April 2023 and NICs rates will then be reduced by the temporary increase.

Working pensioners over the age of 65 are currently exempt from NICs. However, from April 2023, working pensioners will also be required to pay their 1.25% contributions to the health and social care levy.

Dividend tax on shares is also set to rise:

Individuals who receive dividend income will face a higher tax bill as all rates of dividend tax will increase by 1.25% from April 2022.

The dividend tax is applicable on dividend income above the frozen £2,000 dividend allowance and above the £12,570 personal allowance. Dividends on assets held in ISAs are excluded from the dividend tax.

From the 2022-23 tax year, basic rate dividend tax will be charged at 8.75% instead of 7.5% this year. Higher rate dividend taxpayers will be charged at 33.75% instead of 32.5% and additional rate dividend taxpayers will pay 39.35% instead of 38.1% respectively:

Many small business owners operating through limited companies will pay themselves a combination of a modest PAYE salary and the remainder in dividends. This tax increase on dividend income follows the announcement that Corporation Tax is also due to rise.

From April 2023, Corporation Tax is set to rise from 19% to 25%. The government will introduce a new Small Profits Rate of 19% for companies with annual profits of £50,000 or less and for companies with profits between £50,000 and £250,000, they will pay tax at the main rate of 25% reduced by a marginal relief providing a gradual increase in their tax rate.

  • on October 15, 2021