The recently announced rise in National Insurance (NI) and dividend tax was unwelcome news for most workers but especially for business owner managers. What impact can you expect the increases to have on your income?
There’s more to the NI and dividend tax increases than was apparent when they were first announced. The first point to note is that the additional 1.25% NI is a temporary measure for 2022/23 only. For 2023/24 and later years it will be replaced by a new tax known as the health and social care levy. As far as we know the 1.25% added to dividend tax won’t be part of the levy but will be a permanent tax rise.
National Insurance/Health and Social Care Levy
The NI/levy applies to employers as well as employees (including directors) and will be payable on all earnings above the NI thresholds of £9,568 per annum for employees and £8,840 for employers. There are equal and corresponding increases to Class 4 NI rates for the self-employed on their profits.
Examples: The extra NI/levy payable in respect of a director who is paid an annual salary by their company of £30,000 per year will be £519 (£255 for the director and £264 for their company). For a director paid £80,000 per year, the extra NI is a whopping £1,761 (£880 for the director and £889 for their company).
There is a trap for pensioners. Currently those above state pension age don’t have to pay NI on their salary if they are employed or on their profits if they are self-employed. However, the extra 1.25% will apply to their earnings from April 2022.
Dividend Tax Increases
There is no escape for shareholders. The extra 1.25% tax which applies to dividend income means that director shareholders can’t escape the additional cost by paying themselves dividends instead of salary. For 2022/23 and later years the basic rate dividend tax will be 8.75% instead of 7.5%. Higher rate taxpayers will pay 33.75% and additional rate taxpayers, 39.35%. Subject to the fine print, paying dividends will have an advantage over salary as the extra 1.25% will only apply to the director. That is, there’s no corresponding tax/levy for the company.
The Spring Budget didn’t startle, but it was a generally gloomy one for business owners and employees.