How the Dividend Tax and National Insurance Contributions increase will impact you in 2022
The news all last week was that the Prime Minister, Boris Johnson (in case you’ve not been paying attention) announced a rise in the rate of National Insurance and Dividend Tax. This is to raise £36bn over the next three years to help the NHS to recover from the COVID-19 pandemic (which isn’t over yet) and to fund their Social Care package that has been promised and was apparently all ready to go into effect just before the pandemic hit.
I think we all know how hard the NHS has been hit because of the pandemic. That’s not to say it wasn’t struggling before then either. But we have all seen for ourselves just how hard the pandemic has pushed NHS workers and how severely it has affected waiting times. We know it needs investment and support.
The Social Care package is said to fully cover care for those with assets of less than £20k and create a cap of £86k on what people will be asked to pay over their lifetime for care.
This post comes with an advanced warning that we are not sitting on the fence at all regarding this topic because National Insurance and Tax Dividend is a tax that affects in particular lower earners disproportionately to other taxes, such as income tax which increases in relation to a proportion of earnings. It’s also a tax that completely disregards - no it actually protects the assets - of a portion of the population who have a lot of wealth. So this tax increase is making our blood boil more than just a little bit.
2022 National Insurance & Tax Increases
Let’s look at each tax class individually so you can see if it affects you personally, how it is paid and what the tax rate is right now.
National Insurance Class 1
National Insurance is a mandatory tax that is paid if you are 16 and over and are an employee earning more than £184 per week.The amount you pay is 12% of your wages from £184 - £967 per week, then 2% on the amount over £967 per week.
The amount an employer pays directly to the government on top of employee contributions (which is a slightly higher percentage than the employee contribution - currently 13.8%) and is called Class 1A or 1B. Therefore National Insurance contributions are paid by both the employee and the employer.
Company Directors of Limited Companies fall under Class 1, even if the company only has one employee (ie, the Director!). Salary and bonuses are subject to National Insurance.
The new announcement by the government will directly affect Class 1 National Insurance affecting both the employee and the employer contributions.
Class 2 National Insurance
If you are a self-employed person making a profit of more than £6,515 per year (an average of £542 per month) then this is your category. The class 2 contribution is a flat figure of £3.05 per week.
The new National Insurance increases will not affect Class 2 contributions.
However, read on because many self-employed people also pay Class 4 National Insurance too.
Class 3 National Insurance
These are voluntary contributions that can be paid to fill or avoid gaps in a National Insurance record, which will ensure that the full State Pension or some benefits are paid out at the appropriate time.
The new National Insurance increases will not affect Class 3 contributions.
Class 4 National Insurance
This class is for self-employed people who earn profits of more than £9,569 (an average of £797 per month).
The amount you pay is 9% on profits between £9,569 and £50,270 and 2% on profits over £50,270.
The new announcement by the government will directly affect Class 4 National Insurance.
Dividend taxes are paid on dividend earnings above £2,000 per year and are paid depending on your income tax band. The current rates are as follows:
Basic rate: 7.5%
Higher rate: 32.5%
Additional rate: 38.1%
The new announcement by the government will directly affect Dividend Tax payers, which will have a HUGE impact on many micro Limited Companies.
How Much is the National Insurance and Dividend Tax Increase?
The National Insurance and Dividend tax increase is a straight 1.25% on every tax class, each tax band and paid by all contributors.
The government has calculated that this will bring in additional revenue of £36 billion. Most of this is supposed to be spent initially on the NHS with just £5.3bn of that expected to be spent on Social Care.
What is the New NI Rate for 2022?
With the blanket increase of 1.25% across everything, then we can actually produce a simple example to show you what the new rates will be from April 2022:
NI Class Current Rate New Rate
Class 1 Main Rate 12% 13.25%
Class 1 Higher Rate 2% 3.25%
Class 1 Employer Rate 13.8% 15.05%
Example: For an employed person earning £24,100 this would mean an additional £180 to pay. The more you earn, the more you will pay, but not proportionately because it is weighted towards the middle part of your salary (£184 - £967).
Dividend Tax Bands Current Rate New Rate
Basic Rate 7.5% 8.75%
Higher Rate 32.5% 33.75
Additional Rate 38.1% 39.35%
Example: If you are a director of a Limited company with annual dividends of £30,000 in addition to your director salary, you should expect to pay an additional £420 in dividend tax.
If you are the Director of a business that also has employees, this tax increase is going to hit you pretty hard from all angles. And this comes on top of the planned corporation taxes coming into effect in April 2023. This will have a significant impact on small businesses, the self-employed and their employees. Grrrrrr.
Will This Affect My Payments on Account?
A key consideration for the self-employed is that with a higher tax bill you are more likely to be pushed over the threshold for payments on accounts, which is something that you need to consider.
When Does the New National Insurance Rate Come into Effect?
The new tax increases will come into effect in April 2022.
Again, we must remind you that this is in addition to the increases to corporation tax coming into effect April 2023 announced earlier this year.
What Should Self-Employed and Company Directors Do?
Our advice to our clients remains the same as it has always been; budget. We recommend that you plan for your tax payments in advance, open a separate savings account and transfer some money towards your tax bill every month.
For those with limited companies you may consider taking as much dividend as your company will allow (speak to us for individual advice) in this financial year at the current lower rate of dividend tax. We don't specifically advise changing your company structure at this point, certainly not without a detailed conversation about possible options.
Please do get in touch if we can help:
☎️TEL: 01480 775 611
A Personal View
Here at Evolve we are lefties, this isn’t as uncommon for Accountants as you may think, once you understand that trickle down economics doesn't really do what they say it does.
Our disabled daughter relies heavily on the NHS and we often find ourselves fighting for basic services. One day she will need to access adult social care and right now that is a frightening thought with so many being failed.
None of us like the idea that we may one day need care in our homes or to move into residential care but the statistics show something like a third of us will need some sort of support in our adult lives. I don’t know about you but I want to know that I and the people I love will be looked after properly and with dignity when and if needed.
But, like many, I see a lot wrong with these national insurance and dividend tax rises. I am angry for our clients who own Micro Limited Companies and were left with minimum financial support during covid but now have to pay increased tax on their dividends. And I feel deeply for those on lower incomes who will struggle just that little bit more now.
I do firmly agree that more money is needed to support our NHS and social care system. The lefty in me feels that those with more wealth should be shouldering more of the burden than they are being asked to right now - a National Insurance rise really hits lower earners the hardest and it seems like they always bear the brunt of policy changes as easy targets.
Let's hope at least that this money is actually spent on the people who need it!
“True measure of any society can be found in how it treats its most vulnerable” - Gandhi