Earlier this week, the prime minister announced a 1.25% rise in National Insurance Contributions (NICs) and dividend tax from 6 April 2022. As the dust on these announcements settles, it becomes clear that the tax rises are wider-reaching measures than they first appeared.  

National Insurance

The government’s paper ‘Building Back Better: Our Plan for Health and Social Care’ Outlined an increase of 1.25% in primary and secondary Class 1, and Class 4, NICs from 6 April 2022.

From 6 April 2023, the rates of NICs will return to their lower rates, when a formal legal surcharge of 1.25% commences. This will also apply to those individuals working above the State Pension age who currently do not pay NICs.

After the announcements were made, HMRC updated their guidance covering rates and thresholds for employers. This update makes it clear that the 1.25% increase will also apply to other types of NICs:

In both cases, the current 13.8% rates will become 15.05% from 6 April 2022.

NI classes 2 and 3 are not affected by the proposed increase.

On NICs thresholds: the government has chosen not to reveal the thresholds at which NICs applies from 2022-23. This makes it difficult to accurately measure the actual cost of the proposed rise.

Dividends

In addition to the increase in NI rates, it was Announced that Dividend tax will also increase by 1.25% from 6 April 2022.

A wider consequence of this is in respect of loans to participators in close companies.

  • The rate of tax that applies to overdrawn Directors loan accounts under section 455 CTA 2010 is directly linked to the dividend upper rate. This will mean that the s.455 rate will also increase from April 2022, from 32.5% to 33.75%.

Dividend allowance & thresholds: the government's paper also fails to mention whether there will be any changes to the tax free dividend allowance for 2022-23 and does not shed any light on the changes to the basic or higher rate tax bands either. The thresholds are normally left to the chancellor to announce at the Budget and as with the NICs increase, this means that no one can accurately say how much more anyone receiving a fixed rate dividend might actually pay.

Scotland

The announced changes will also apply to Scottish taxpayers.

Due to the Scottish NIC thresholds being linked to the UK, Scottish taxpayers with employment income between the Scottish and UK higher-rate Income Tax thresholds (£43,662 and £50,270 respectively in 2021-22), will be liable to a marginal tax rate of 54.25% on that part of their income, from April 2022.

  • This 54.25% marginal rate compares to a marginal rate of 33.25% for taxpayers elsewhere in the UK, in the same income bracket.

Useful guides on this topic

Increases to National Insurance Rates
The government has announced its plan for funding the NHS and social care sector. This will include a new Health & Social Care Levy which will be delivered by a raise in Class 1 and Class 4 National Insurance Contributions (NICs) of 1.25%.

Increases to Dividend Tax Rates
The prime minister has announced a 1.25% increase to dividend tax rates from April 2022 as part of a package of measures to fund the costs of social care and the NHS.

Dividend tax (subscriber guide)
This practical tax guide explains how dividends are taxed on or after 6 April 2016. It includes HMRC's own examples, more detailed examples, including an Owner Managed Business (OMB) section together with tax planning tips.

Directors' loan accounts: Toolkit (subscribers)
HM Revenue & Customs (HMRC) do a toolkit for advisers. This is our enhanced version with planning points. 

External links

Building Back Better: Our Plan for Health and Social Care

Rates and thresholds for employers 2021 to 2022


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Comments (2)

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Jonathan has articulated my immediate thoughts when this was announced. I am a self employed full time tax adviser. Drawing SRP. The tax year 2021-22 is my first year of paying no NIC's (celebration after paying for 48 years!) but I suspect this...

Jonathan has articulated my immediate thoughts when this was announced. I am a self employed full time tax adviser. Drawing SRP. The tax year 2021-22 is my first year of paying no NIC's (celebration after paying for 48 years!) but I suspect this will be short lived. I wonder how the Class 4 regime would work....does this mean that we "new pensioners", still working out of necessity, will be penalised by paying more than 1.25%? I haven't seen anything yet on this topic but would be interested to know what your team have heard on this issue.

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Dear Nichola/Team

As ever thank you for the website which I find practical and authoritative resource that I use a great deal.

With regards to the increases in National Insurance and Dividends for 2022/23 my understanding is that HMRC would not...

Dear Nichola/Team

As ever thank you for the website which I find practical and authoritative resource that I use a great deal.

With regards to the increases in National Insurance and Dividends for 2022/23 my understanding is that HMRC would not have been able to update their systems in order to introduce the legal surcharge as a separate and distinct levy in time for a 6 April 2022 commencement date.

Hence the decision of charging the Levy via National Insurance and Dividends increases as, effectively, an expedient stop gap measure, and pending the introduction of a stand alone legal surcharge commencing 6 April 2023.

When the formal legal surcharge of 1.25% does commence, I wonder if its scope will be widened so it becomes a universal levy applicable to all types of income, thereby bringing rental and other income reported and taxed under Self Assessment within the scope of the surcharge?

Allied to this, and as will be the case with the increase in Dividend Tax Rates, should the surcharge become universally applied there will, potentially, be the timing benefit of increased Payments On Account under Self Assessment.

Once this idea of a hypothecated tax has been established the 1.25% legal surcharge could also be applied to Capital Gains tax and even Inheritance Tax. This being a means of raising tax revenues in a way that can be portrayed as being "fair". It can also be held out as a means of funding services that are popular with with the public, making what will probably end up as a 1.25% tax increase less difficult to justify and easier to "sell" to the public.

May you live during interesting times indeed!

Best regards

Jonathan (Hawkes)

jonathan@handats.co.uk

.

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