National Insurance Contributions
From April 2022 National Insurance Contributions (NIC) will increase by 1.25% across the UK. The NIC increase is being badged as ‘temporary’ and applies to NIC paid by employees, employers and the self-employed. From April 2023, NIC rates will revert to those currently in force and instead a separate ‘Health and Social Care Levy’ will be charged which is equal to the NIC increase. This levy applies to all earned income meaning those who have reached state pension age but continue to work will also be within the scope of the charge. This increase is forecasted to raise £12bn of taxes annually and will fund social care as well as help the NHS recover after the Covid-19 pandemic.
The additional NIC/Levy means that an employee or self employed individual earning £20,000 will pay an extra £130 in taxes per annum whilst an individual earnings £80,000 will pay an extra £880. This increase is also a cost to employers as well as an additional administrative burden, although it has been confirmed that existing reliefs, such as the £4,000 employment allowance, will apply to the levy.
There is also a 1.25% increase in dividend tax rates from 1 April 2022 with rates increasing to 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers and 39.35% for additional rate taxpayers. The £2,000 dividend allowance will remain. This increase is aimed to stop business owners from getting around the increased charge on earnings by drawing down dividends instead.
Although tax rises to fund the costs of the pandemic were somewhat expected, it was anticipated that Capital Gains Tax or Inheritance Tax might bear the brunt of the rises, not taxes covered by the manifesto pledge. Business groups have already commented that the increased costs after such difficult trading conditions during the pandemic will be a challenge for many and will disproportionately impact lower paid workers.
If you would like to discuss these changes, please do not hesitate to contact Jill Walker, Private Client Tax Director, or your usual AAB contact.
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