The government plans to increase National Insurance (NIC) rates by 1.25% across the UK, effective from April 2022 and applicable to employee and employer contributions. The increase will also apply to Class 4 NIC which is payable by the self-employed. The additional charge is being branded as a "health and social care levy" but in effect it is NIC.
The announcement is a breach of the Conservative's manifesto commitment to a "triple lock" on Income Tax, NIC and VAT.
In a break from the current system, working people who have reached the State Pension age will (from April 2023) also be liable to pay the levy; currently individuals stop paying NIC once they reach the State Pension age.
Existing NIC reliefs to support employers are expected to apply to the levy, including the reliefs for people under age 21, apprentices under age 25, and of course there is also the £4k Employment Allowance. The Federation of Small Businesses is already calling for an increase in the Employment Allowance to support small business owners and protect jobs.
The rates of taxation applicable to dividends are also expected to increase by 1.25% from April 2022, further punishing the many small business owners who reward themselves primarily in dividends. The top rate of income tax on dividend income will therefore rise to 39.35% - nearly twice the 20% top rate of Capital Gains Tax applicable to most assets. There is a clear incentive for individuals with material shareholdings in companies to try to structure their returns as capital, rather than income.
The work and pensions secretary has also announced that the pensions "triple lock" is being suspended for a year, to avoid a big state pension increase next year. Pensions are now expected to rise next year by about 3%, rather than 8% had the triple lock not been suspended.
The overall tax burden as a share of national income is now reported to be at its highest level since the late 1960's.
National debt now stands at about 100% of GDP and Rishi Sunak has said that additional spending on social care must be funded by higher taxes, rather than more borrowing. Sajid Javid has warned that the current NHS waiting list of 5m people could balloon to 13m without action.
The announcement of the proposed changes more than six months before they take effect means that there is time to reduce the impact. Employees could consider agreeing a salary sacrifice arrangement with their employer, for example sacrificing their £5,000 annual bonus for an additional pension contribution paid by their employer. Such an arrangement would save 1.25% NICs for both employee and employer as well as £2,000 income tax where the employee is a higher rate taxpayer.
Employees might also consider a salary sacrifice in favour of an electric company car.
Shareholder/directors of family companies could consider bringing forward dividend payments to before 6 April 2022. Such a strategy needs careful planning as if the extra dividend takes the taxpayer’s income above £50,270 the excess would be taxable at the 32.5% rate instead of the 7.5% rate and the planning could backfire.
Contact us to discuss anything you've read in this article.