How the Dividend Tax and National Insurance increases could affect you

Article written by Kellands Hale, our preferred independent advice firm.

This article is not intended to be financial advice to any individual. The views expressed are those of the author and Moneyfactscompare.co.uk does not endorse the content.

In September 2021, the government announced a change to both Dividend Tax and National Insurance contributions (NICs), which have come into immediate effect on 6 April 2022.

These changes see both Dividend Tax and NICs increase by 1.25 percentage points, meaning that as an employee, company director, or business owner, your wealth will be directly affected.

You could be concerned about how your earnings may be adversely affected by the rise in Dividend Tax and NICs, and how your company might fare with the additional NICs burden as we emerge from the pandemic.

Read on for everything you need to know about how these policy changes could affect your wealth in the coming years.

Dividend Tax rates increased by 1.25 percentage points from April 2022. This change will mostly affect investors and business owners.

As a director or entrepreneur, you might take dividends as part of your remuneration, in order to mitigate the amount of Income Tax you pay.

You may also receive dividends from shares you hold.

Although a 1.25 percentage point rise in Dividend Tax might sound incremental, it comes alongside a simultaneous increase to NICs, and an additional rise in Corporation Tax that is set to come into effect in 2023.

The below table compares the Dividend Tax rates in the 2021/22 tax year, and from the 2022/23 tax year onwards.

Source: FTAdviser

If you take home more than £2,000 a year in dividends, you will face a slightly higher bill regardless of your Income Tax band.

For example, if you’re a higher-rate taxpayer taking £40,000 in dividend payments then you would pay 33.75% on £38,000 of dividends. This would result in a Dividend Tax bill of £12,825, up £475 from the current system.

From April 2022, employees are subject to a temporary increase in their NICs, which will be used to help fund the NHS, health and social care.

The 1.25% increase will also be applied to employers, meaning that if you run a business, your personal and corporate wealth will both bear this change.

This additional contribution will then become a “Health and Social Care Levy” from April 2023 and will appear as a separate deduction on payslips.

Taking into account that the National Insurance threshold rise which is due to take place in July, an individual earning £50,000 per year can expect to see their NICs rise from £4,852 to £5,049, which is equivalent to a £197 tax increase.

If you earn a salary of £100,000 you can expect your annual contributions to rise by £822.

If you run your own business, this tax could be a “double whammy”, as you’ll also pay increased employer NICs. For the individual earning £50,000, this would see the amount of employer’s National Insurance increase from £6,900 to £7,525.

As an employer, you will not have to pay the extra 1.25% for employees who earn less than £50,270 and fall within a specific category, such as apprentices under the age of 25 or employees under the age of 21.

Around 1 million working pensioners will pay NICs on their earnings for the very first time from 2023.

Under the current system, taxpayers stop making NICs when they reach 66 and begin receiving the State Pension.

However, under this latest reform, a working pensioner earning £60,000 a year will go from paying nothing to paying £630 a year in National Insurance, on top of Income Tax.

If this reform applies to you, you can expect to pay National Insurance at a rate of 1.25% from April 2023. While this does not come into effect for 12 months, it may be wise to work with your financial planner in order to prepare for the change.

If you take dividends as part of your remuneration, you could be concerned about how this 1.25 percentage point rise might affect your personal wealth over time.

While taking dividends is still likely to be a more tax-efficient remuneration strategy than solely drawing a salary, you will pay higher tax on your dividends in the coming years. In light of this change, you could be searching for alternative ways to maximise your earnings.

One such way is by making pension contributions. Currently, a company can make contributions to personal pension plans for a business owner. Any employer pension contributions made “wholly and exclusively for the purposes of the business” can receive both Corporation Tax and National Insurance relief.

In 2022/23 that is a 15.05% National Insurance saving, which you could redirect to your pension pot. And, with Corporation Tax set to rise sharply for many businesses from April 2023, there could be even more convincing reasons to consider this approach.

Similarly, you may be looking for ways to mitigate the rise in NICs.

One way could be to consider additional pension contributions through a “salary sacrifice” arrangement.

Under a salary sacrifice arrangement, you give up part of your salary or bonus and, instead, your employer pays this amount directly into your pension. This is different from the normal “net pay” system where your contributions are deducted from your pay before your salary is taxed.

While your pension payments are free from Income Tax (or are eligible for pension tax relief if they are paid after Income Tax), they are usually subject to NICs. However, if you pay pension contributions through salary sacrifice, they do not form part of your pay and are free from National Insurance charges.

This benefits you as you pay less NICs. It benefits your employer too, as they also pay less NICs. Indeed, some employers will redirect the NICs savings they make into your pension as an additional perk.

Of course, you should remember that your pension fund won’t be accessible until you are 55, or 57 if you retire after 2028. So, if you choose to reallocate some of your remuneration to your pension, you need to be able to afford to “sacrifice” the sum you contribute to your pension until then.

Additionally, using salary sacrifice can reduce your borrowing potential when you apply for a mortgage, or reduce the value of other perks, such as “death in service” benefit.

If your wealth will be affected by the Dividend Tax and NICs rise in the coming tax year, now is the time to get in touch with us.

We can help you to build your wealth tax-efficiently and create a financial plan to help you achieve your life goals.

Email us at hale@kelland.co.uk, or call 0161 929 8838.

Please note

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.