Prime Minister Boris Johnson has suggested a variety of tax hikes for UK taxpayers.
The government intends to implement a new social care charge beginning in April 2022, which would result in increases in UK-wide taxation and National Insurance Contributions (NICs). Earned income NICs will rise by 1.25 percent, and dividend tax rates will rise by 1.25 percent as well. The funds generated will be set aside for health and social care expenses.
The levy will be a new tax distinct from NICs, but HMRC will need time to modernize its IT systems. Initially, monies will be obtained through raising NIC rates. Once HMRC’s systems have been upgraded (which is expected in 2023-24), a new 1.25 percent surcharge will replace the rise in NIC rates and will also apply to anyone working above the State Pension age.
Mr. Johnson referred to the package as the “largest catch-up initiative” in the history of the NHS.
The £12 billion more revenues from the new health and social care charge will help the NHS deal with a patient backlog in the early years. The budget also includes a ring-fence of £2.2 billion each year for Scotland, Wales, and Northern Ireland.
How much will I have to pay in addition?
The Health and Social Care Levy will apply to workers and employers who are subject to Class 1 NICs, as well as self-employed persons who are subject to Class 4 NICs. It will be available beginning in April 2022.
An typical basic-rate employee earning £20,000 per year will contribute an extra £130 per year. Meanwhile, a typical higher-rate employee earning £80,000 would pay an additional £880 per year.
It is vital to remember that the NIC rise will also affect businesses, who will be required to pay an extra 1.25 percent in employer NICs beginning in April 2022.
Employers will be required to pay the levy for workers earning more than the Secondary Threshold of National Insurance, which in 2021-22 is £8,840. Existing reliefs will be extended to employers of apprentices under the age of 25, all workers under the age of 21, veterans, and new employees in Freeports beginning in April 2022.
The Employment Allowance enables qualifying employers to lower their NICs responsibility by up to £4,000 per year, which means that the government believes that 40% of small company owners will pay no additional employer NICs.
From April 2023, the Health and Social Care Levy will be a distinct tax on earned income, and NICs rates will be cut to reflect the temporary rise.
We have indicated below how the rates for workers and employers are anticipated to rise:
| Employee Main / higher rate | Employer | |
|---|---|---|
| Current NICs rates (2021-22) | 12% / 2% | 13.8% |
| 2022-23 NICs rates | 13.25% / 3.25% | 15.05% |
| Charged on all earnings/profits above: (2021-22 thresholds) | £9,568 | £8,840 |
We have also included a table to show the impact on the Self-Employed:
| Self-employed main / higher rate | |
|---|---|
| Current NICs rates (2021-22) | 9% / 2% |
| 2022-23 NICs rates | 10.25% / 3.25% |
| Charged on all earnings/profits above: (2021-22 thresholds) | £9,568 |
Working seniors above the age of 65 are presently free from National Insurance contributions. Working pensioners, on the other hand, will be expected to make their 1.25 percent payments to the health and social care tax beginning in April 2023.
Dividend taxation is also projected to increase.
Individuals who receive dividend income will also face a higher tax cost, as all dividend tax rates will rise by 1.25 percent beginning in April 2022.
Dividend tax is levied on dividend income that exceeds the fixed £2,000 dividend limit and the £12,570 personal allowance. Dividends on assets kept in ISAs are exempt from dividend taxation.
The base rate dividend tax will be 8.75 percent beginning with the 2022-23 tax year, up from 7.5 percent this year. Higher rate dividend taxpayers will be taxed 33.75 percent rather than 32.5 percent, and extra rate dividend taxpayers will be charged 39.35 percent rather than 38.1 percent:
Dividend Tax Rates
| Basic Rate | Higher Rate | Additional Rate | |
|---|---|---|---|
| Current dividend tax rates (2021-22) | 7.5% | 32.5% | 38.1% |
| 2022-23 dividend tax rates | 8.75% | 33.75% | 39.35% |
Many small company owners who operate via limited companies will pay themselves a modest PAYE income and the rest in dividends. This tax hike on dividend income comes on the heels of the news that Corporation Tax would also be raised.
Corporation Tax is planned to increase from 19% to 25% beginning in April 2023. The government will implement a new Small Revenues Rate of 19% for businesses with yearly profits of £50,000 or less, while businesses with profits between £50,000 and £250,000 would pay tax at the main rate of 25%, lowered by a marginal relief giving a progressive rise in their tax rate.
“While many may debate the politics of such a move, the hard truth is that tax increases are generally anticipated when the economy recovers from Covid-19.” We expect there will be more as the government attempts to balance its books and boost public-sector investment.
“The problem for all those affected companies and people is to comprehend what these changes will entail and how to effectively prepare for them.”
If you need assistance in identifying the most tax-efficient method to pay yourself as an owner-manager of a small limited business, we can advise you on the best path forward in the next years.