April is always a time for change in the world of finance. The new budget is released, it’s the end of the financial year for the majority of businesses, and changes to various taxes are brought into effect. But this year things are looking a bit different. Instead of the standard incremental increase to National Insurance Contributions (NICs) and tax on dividends, this year the Prime Minister announced a new rise in both. But what does that mean for you and your business and is it a permanent change?
Why the rise?
There is no denying that the pandemic has been a huge challenge for every industry, but none more than in healthcare. The NHS has been put under enormous strain as it tries to handle all of the normal healthcare needs on top of rising Covid-19 cases and struggles with funding. In an effort to help ease the strain of the latter, in September the prime minister announced that there would be an increase to both NICs and dividend tax in April 2022, to the tune of 1.25%. While this strategy goes against the Conservative manifesto, but they have confirmed that the income from this raise (which is estimated to be around £12bn annually) will be ringfenced for ‘health and social care’. This includes funding the NHS, recovery from the pandemic and the gap in social care costs.
The numbers
We hope you will agree that any extra support we can give the NHS is a positive thing at the moment. But that does mean you will need to adjust your figures for 2022 and beyond to take into account this new rate of NIC and divided tax. In simple terms, the changes look like this:
National Insurance: There will be a 1.25% increase in Class 1 primary (employee), Class 1 secondary (employer) and Class 4 (self-employed) NICs. This raise is intended for one year only, and NICs will return to their previous rate for 2023. This means that a Class 1 (employer) would go from the 13.8% it was this year up to 15.05%.
Dividends: There will be a 1.25% increase in dividend tax across all tax bands, and this will impact all taxpayers with a total dividend income above the dividend allowance. This means that the basic taxpayer rate will go from 7.5% to 8.75%, the higher rate from 32.5% to 33.75%, and the additional rate from 38.1% to 39.35%.
While in the past you may have been able to avoid these raises, that won’t be the case with these. However, there are some creative ways you can minimise the impact of these rises to your business. For example, if you predict cash flow issues, you may want to bring forward any bonus payments or irregular dividend payments so that they are taxed at the current rates. How you handle this will depend on your specific business, so we recommend speaking with your accountant before taking any action.
What does the future hold?
The big difference between this raise and the normal April changes is that this is not a permanent thing. The government have confirmed that the rise in rates is only temporary and will return to 2020/21 levels in April 2023. This is not because they don’t think the NHS will need the funding past this point, but because it gives them time to formalise their funding plan, which is titled the Health and Social Care Levy.
The new levy is fairly similar to the raise, and will be applied to anyone who:
- Pays Class 1 (employee and employer)
- Class 1A and 1B
- Class 4 (self-employed)
- Is over state pension age but in work, or profits from self-employment above £9,568
The levy will apply to the whole of the UK, and HMRC will be responsible for managing and collecting it through the existing PAYE and Income Tax Self-Assessment channels. The main difference for employers is that all levy contributions will need to appear as separate items on employee payslips from 2023-24, along with a message confirming what it is (with exact text released later in the year).
At Purple Lime we know it can be daunting to try and navigate these things by yourself, especially if you are unsure of the impact it will have on you and your business. That is why we offer a free, no obligation consultation to get to know you and understand how your business works. From there we can provide you with advice and support to make the most of your money and get your business on the right track to success. If you would like to know more, please get in touch by emailing hello@purplelime.uk.com or calling us on 01249 263 333.