Tuesday, October 19, 2021

Increased National Insurance and tax rates on Dividends: How will the changes affect you? By Jennie Brown, Streets Chartered Accountants

Jennie Brown, Tax Partner at Streets Chartered Accountants, discusses tax changes and how they will affect employees, employers, and the self-employed.

The government has announced tax changes to fund £12 billion a year to be spent on the NHS and social care across the UK.

What are the new rules and when will they come into effect?

National Insurance contributions (NICs) will increase by 1.25% for one year only for employees, employers and the self-employed from‌‌ ‌April‌‌ ‌2022. This will cover both Class 1 (employee and employer), Class 1A and 1B and Class 4 (self-employed) NICs. Those above State Pension Age are not impacted by the April 2022 changes.

From April 2023, a new ringfenced Health and Social Care Levy of 1.25% will be introduced which will apply to those who pay Class 1 (employee and employer), Class 1A and 1B and Class 4 (self-employed) NICs and will also be extended to those over State Pension age who are in work. When the new levy comes into effect, National Insurance rates will revert back to current levels.

The levy will also apply to individuals above State Pension age with employment income or profits from self-employment above £9,568. The levy will be administered by HMRC and collected through the current reporting and collection procedures for NICs; Pay As You Earn and Income Tax Self-Assessment. Like National Insurance, levy contributions will apply UK-wide, people will pay the same in England, Scotland, Wales and Northern Ireland.

From 2023-24, levy contributions will need to appear as a separate item on payslips. Where possible a generic message should be included in payslips for the next tax year (2022-23). More information on payslip requirements will be available in due course. In addition to the new Health and Social Care Tax, the government will also increase by 1.25%, from April 2022, the rate of income tax which is paid by people who receive dividend income from shares.

As an employee how much more tax will you pay?

To give an indication of what this means in terms of the additional tax payable, the increase will see an employee on £20,000 a year pay an extra £130, an employee on £50,000 will pay an extra £505 and an individual on £100,000 pay an extra £1,130.

What can you do if you are an employer or employee?

For employees who are not shareholders, your employer may provide a benefits package that includes salary sacrifice and could enable you to also alter the way in which you are remunerated, which may be sensible to explore and ensure you have fully considered.

As a result of this change, together with businesses having to assess their workforce with regards to aspects such as hybrid working, it may well be that employers address their remuneration offering.  Company cars for example may be less attractive but putting in place a well-managed pension scheme may be more attractive and enable employees greater flexibility over how they take their remuneration.

What can you do if you are a business owner or self employed?

If you operate your own business, you may want to consider how you are remunerated moving forwards.  For many business owners a combination of salary and dividends has been an effective way to pay themselves, however in recent years the tax rate on dividends has increased, the 10% tax credit removed and therefore the changes have bridged the gap between income tax rates on salary and dividends. The tax saving of dividends over time, has gradually been eroded.

Not only this but many business owners who have opted for a lower salary and higher dividends, will have received support during the pandemic based on their salary alone, as the furlough support provided did not include dividend income. Dividends are also paid from profits that have already suffered corporation tax, unlike salary, and therefore the expense is not a tax-deductible expense for the business.

In addition, other practicalities such as mortgage applications have in the past been more difficult to apply for with lower salary and higher dividend income, together with the requirement to make lump sum payments and payments on account where high levels of dividend income are paid, in contrast to the monthly collection of tax via PAYE for salary, which may be seen as an easier way to manage personal cashflow.

The recent increase to the taxation on dividends may therefore see many business owners want to take stock of how they are remunerated. It may be where profits are being extracted above living expenditure requirements, instead the excess is used to make Pension Contributions, a tax-deductible expense and providing for the future in an Inheritance Tax efficient way.

There are many options that business owners may now be well placed consider, taking into account the position for both the business and their personal circumstances, to assess the optimum way of being remunerated. Where there are a number of shareholders with different personal circumstances, naturally, having the ability to be remunerated in the most effective way is important. Whilst shareholders may have the same common goal and ambitions for the business, it is critical that as individuals, they can be remunerated in such a way as to optimise their personal position and this may give rise to planning surrounding a variation to share rights concerning dividends.

For companies and sole-traders, really making sure you are aware of the expenditure you are able to offset against your income will be even more important. Having good records to ensure tax relief is claimed and understanding the rules around Capital Allowances and the new Super-Deduction is important to ensure you do not miss out.

If you are a business looking at the shareholders remuneration or looking at the offering you provide your employees or if you are an employee with a remuneration package you are uncertain over, then do get in touch. The team at Streets are well placed to help advise you with the optimum remuneration for your circumstances.

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