In September 2021 the Government announced the introduction of a new Health and Social Care Levy to help fund future health and social care across the UK. Whilst the new levy does not come into force until April 2023, there will be a temporary increase in National Insurance Contributions (NIC) and also dividend rates from 6 April 2022.
Temporary increase in some taxes
The temporary measures from April 2022 will see the following tax increases:
- 1.25% increase on employers National Insurance (NI).
- 1.25% increase on employees NI (This will also apply to employees over the state pension age who currently don't have to pay any NI).
- 1.25% increase on the dividend tax rates.
NB The above tax increases apply to both the main and additional rates of Class 1, Class 1A, Class 1B and Class 4 NIC. People who only pay Class 2 and 3 NIC will not be affected by these changes.
The above tax increases will apply to the 2022 to 2023 tax year only. From the 6 April 2023 the above NIC and dividend increases will decrease back to their 2021 to 2022 tax year levels. However this will be replaced by the new 1.25% tax on income called the Health and Social Care Levy.
Increased costs for businesses
For the next 12 months businesses with employees and the self employed could see their NICs rise substantially. For example, the increase in employer NIC on an employee's salary of £20,000 per annum would be £139. However, an employee on £80,000 would cost the business £889 in additional NIC. There is also an administrative burden for payroll staff to administer the NIC changes when running the payroll.
Less salary for employees
The temporary tax increase will also have a negative impact on employees, with someone earning £20,000 a year seeing an additional £130 taken off their salary. Likewise someone on a salary of £80,000 would be £880 worse off due to the increased employees NIC. For many this will make the next 12 months even harder as higher inflation takes effect and every day living costs for food and energy increase.
Triple whammy for sole company directors
For sole company directors who are both employees and shareholders and who pay themselves dividends, they will be subject to all three tax increases, thereby increasing their costs by 3.75% between April 2022 and April 2023.
Proactive tax planning steps to consider
With plenty of warning being made of these changes there is time for businesses, including sole company directors, to put in place plans that will help to mitigate some of these tax increases. This could include:
- Offering share options to senior staff and/or higher rate taxpayers, rather than giving them bonuses or pay rises.
- Bringing forward the payment of dividends or bonuses to before 6 April 2022, so that tax on these is paid at the current rates.
- Using salary sacrifice to increase pension contributions and thereby reducing NIC for both employer and employee.
- Using salary sacrifice to reduce salary in lieu of buying more holiday or signing up to the cycle to work scheme or buying electric vehicles.
Whenever the Government introduce new tax legislation it can appear daunting and costly at the outset. We can help you to review your options and make suggestions on how to reduce the impact of the new Health & Social Care Levy, simply call Daniel Wilkinson on 0113 320 0001 or email us at firstname.lastname@example.org.