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As a business owner you are expected to make National Insurance Contributions, as well as pay a tax on any dividends you receive from your (or other) businesses. Over the years these have been slowly creeping up with the new budget announcements, but this year things are looking a little different. With so many new rules, taxes and other things to consider, it can be incredibly confusing to try and work out what these new changes will mean for you and your business. But never fear, we are here to help.
Why is there a raise?
In September the Prime Minister announced that there would be an increase to both National Insurance contributions and dividend tax of 1.25%, effective from April 2022. 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. It’s been described as ‘the biggest catch-up programme in UK history, and it marks one of many changes on the horizon in response to the global pandemic.
That all sounds positive, if a little expensive, but it can be difficult to visualise what that will mean for your business. So what is it that’s changing, and how will it impact you?
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 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%.
Unfortunately avoiding these raises is not possible, but there are some things you can do to mitigate any cashflow problems they may cause. For example, SMEs may want to look at bringing forward any bonus or dividend payments ahead of the changes, so that they are still taxed at the current rate. Of course you should always speak to your accountant before making decisions like this, to ensure everything is done correctly and in good commercial interest.
The government have themselves said that the raise is a temporary measure, and after 2022 NICs will return to 2020/21 levels. This is mainly because this gives them time to formalise their funding plan properly. It is called the Health and Social Care Levy, and the premise is fairly similar. The new levy 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
This new levy, which apply to the entire UK, will be managed by HMRC and will be collected through the existing reporting and collection procedures for NICs – PAYE and Income Tax Self-Assessment. For employers, this means that from 2023-24 all levy contributions will need to appear as a separate item on payslips. There will be more information released on payslips in the future, and we will keep you updated when it does.
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 email@example.com or calling us on 01249 691360.