On 7 September 2021 the government confirmed some tax and NI rates would increase to help fund the NHS and social care. How will the changes affect you?
NI
From April 2022, the rates of Class 1 (both primary and secondary) and Class 4 NI will increase by 1.25%. From April 2023, this will be a separate tax, the Health and Social Care Levy, and will apply to all workers – including those above State Pension age.
Threshold. The usual NI thresholds and limits will apply, so employed clients earning less than £9,568 will pay nothing. Those earning above the threshold amount (which hasn’t been confirmed for 2022/23 yet) will initially pay at 13.25%, with a rate of 3.25% applying above the upper earnings limit of £50,270. For the self-employed, the lower profits limit must be exceeded before a rate of 10.25% applies. Once profits exceed £50,270 the rate is also 3.25%. Employers’ NI will also increase. Class 2 and 3 contributions are unaffected.
Pro advice. A quick way of working out approximately how much extra the increase will mean is to deduct £9,568 from your earnings/profits and multiply the result by 1.25%.
Dividends
So that company owners don’t avoid the new charge by paying dividends instead of salary, the dividend tax rates will all increase:
- for dividends falling within the basic rate band, from 7.5% to 8.25%
- for dividends falling within the higher rate band, from 32.5% to 33.75%
- for dividends falling within the additional rate band, from 38.1% to 39.35%.
Small company owners will be affected by this, with the overall tax and NI bill for a single director shareholder of a company with profits of £80,000 increasing by almost £700 (where profits are fully extracted). You may wish to discuss extraction planning, and even disincorporation, with clients, particularly with the corporation tax increase coming in 2023.
The rates of Class 1 and Class 4 NI, and the dividend tax rates, will increase by 1.25% from April 2022. Discuss profit extraction plans for small company clients. Consider disincorporation if the company is no longer tax efficient.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.