1.25% NICs and Dividend Tax rises – the wider implications
As we prepare for the 1.25% rise in National Insurance Contributions (NICs) and dividend tax from 6 April 2022, it has become apparent that the rise is wider-reaching than many might have initially realised.
The Government is introducing an increase of 1.25% in primary and secondary Class 1, and Class 4, NICs from 6 April 2022 affecting employees, employers and the self-employed. From April 2023, the rates of NICs will return to their lower rates, when a formal legal surcharge of 1.25% commences.. At that point this will also include those individuals working above the State Pension Age who currently do not pay any NICs.
HM Revenue & Customs (HMRC) has updated their guidance covering rates and thresholds for employers, making it clear that the 1.25% increase will also apply to other types of NICs such as Class 1A NICs on Benefits in Kind and Class 1B NICs in respect of PAYE Settlement Agreements. In both cases, the current 13.8% rates will become 15.05% from 6 April 2022.
National classes 2 (Self employed ‘Stamp’) and 3 (Voluntary contributions) are not currently affected by the proposed increase.
Coupled with the increase in the National Living Wage from £8.91 to £9.50 per hour from April 2022, this is placing an increased financial burden on employers.
In addition to the increase in National Insurance rates, dividend tax will also increase by 1.25% from 6 April 2022.
What was not immediately apparent is that a wider consequence of the dividend tax increase applies to loans to participators in close companies. The rate of tax that applies to overdrawn directors’ loan accounts is linked to the dividend upper rate. This will mean that the tax rate will also increase from April 2022, from 32.5% to 33.75%.
Please speak to us about the implications of the change on you and your business. We are here to help.