Ouch! NICs and Dividend Tax rises hit wider than first thought

In September 2021 the prime minister announced a 1.25% rise in National Insurance Contributions (NICs) and dividend tax from 6 April 2022. As the dust settles, it becomes clear that the tax rises are wider-reaching measures than they first appeared.  

National Insurance

The government paper ‘Building Back Better: Our Plan for Health and Social Care’ Outlines an increase of 1.25% in primary and secondary Class 1, and Class 4, NICs from 6 April 2022.

• From 6 April 2023, the rates of NICs will return to their lower rates, when a formal legal surcharge of 1.25% commences. his will also apply to those individuals working above the State Pension age who currently do not pay NICs.

HMRC has updated their guidance covering rates and thresholds for employers. This update makes it clear that the 1.25% increase will also apply to other types of NICs:

• Class 1A NICs on Benefits in Kind.
• 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.

NI classes 2 and 3 are not affected by the proposed increase.

On NICs thresholds: the government has chosen not to reveal the thresholds at which NICs applies from 2022-23. This makes it difficult to accurately measure the actual cost of the proposed rise.

Costings: how much will the rise in NI cost you? See Increases to National Insurance rates from 6 April 2022

Dividends

In addition to the increase in NI rates, it was Announced that Dividend tax will also increase by 1.25% from 6 April 2022.

A wider consequence of this is in respect of loans to participators in close companies.

• The rate of tax that applies to overdrawn Directors loan accounts under section 455 CTA 2010 is directly linked to the dividend upper rate. This will mean that the s.455 rate will also increase from April 2022, from 32.5% to 33.75%.

Dividend allowance & thresholds: the government's paper also fails to mention whether there will be any changes to the tax free dividend allowance for 2022-23 and does not shed any light on the changes to the basic or higher rate tax bands either. The thresholds are normally left to the chancellor to announce at the Budget and as with the NICs increase, this means that no one can accurately say how much more anyone receiving a fixed rate dividend might actually pay.

Costings: how much will the rise in Dividend tax cost you?See Increases to Dividend Tax from 6 April 2022

Scotland

The announced changes will also apply to Scottish taxpayers.

Due to the Scottish NIC thresholds being linked to the UK, Scottish taxpayers with employment income between the Scottish and UK higher-rate Income Tax thresholds (£43,662 and £50,270 respectively in 2021-22), will be liable to a marginal tax rate of 54.25% on that part of their income, from April 2022.

• This 54.25% marginal rate compares to a marginal rate of 33.25% for taxpayers elsewhere in the UK, in the same income bracket.

Useful guides on this topic

Increases to National Insurance Rates
The government has announced its plan for funding the NHS and social care sector. This will include a new Health & Social Care Levy which will be delivered by a raise in Class 1 and Class 4 National Insurance Contributions (NICs) of 1.25%.

Increases to Dividend Tax Rates
The prime minister has announced a 1.25% increase to dividend tax rates from April 2022 as part of a package of measures to fund the costs of social care and the NHS.

Dividend tax (subscriber guide)
This practical tax guide explains how dividends are taxed on or after 6 April 2016. It includes HMRC's own examples, more detailed examples, including an Owner Managed Business (OMB) section together with tax planning tips.

Directors' loan accounts: Toolkit (subscribers)
HM Revenue & Customs (HMRC) do a toolkit for advisers. This is our enhanced version with planning points. 

External links

Building Back Better: Our Plan for Health and Social Care

Rates and thresholds for employers 2021 to 2022