NIC and Dividend Tax rises

NIC and Dividend Tax rise

The Prime Minister announced a 1.25% rise in National Insurance Contributions (NICs) and dividend tax from 6 April 2022. As the dust on these announcements settles, it becomes clear that the tax rises are wider-reaching measures than they first appeared.

National Insurance

The government’s paper ‘Building Back Better: Our Plan for Health and Social Care’ outlined an increase of 1.25% in primary and secondary Class 1, and Class 4, NICs from 6 April 2022.

From 6 April 2023, the rates of NICs will return to their lower rates, when a formal legal surcharge or Levy of 1.25% commences. This will also apply to those individuals working above the state pension age who currently do not pay NICs.

After the announcements were made, HMRC updated their guidance covering rates and thresholds for employers. This update makes it clear that the 1.25% increase will also apply to other types of NICs:

• Class 1A NICs on Benefits in Kind.
• Class 1B NICs in respect of PAYE Settlement Agreements.

In both cases, the current 13.8% rates will become 15.05% from 6 April 2022.

NI classes 2 and 3 are not affected by the proposed increase.

On NICs thresholds: the government has chosen not to reveal the thresholds at which NICs applies from 2022/2023. This makes it difficult to accurately measure the actual cost of the proposed rise.

Dividends

In addition to the increase in NI rates, it was announced that dividend tax will also increase by 1.25% from 6 April 2022.

A wider consequence of this is in respect of loans to participators in close companies.

• The rate of tax that applies to overdrawn directors loan accounts under section 455 CTA 2010 is directly linked to the dividend upper rate. This will mean that the s.455 rate will also increase from April 2022, from 32.5% to 33.75%.

Dividend allowance & thresholds: the government's paper also fails to mention whether there will be any changes to the tax free dividend allowance for 2022/2023 and does not shed any light on the changes to the basic or higher rate tax bands either. The thresholds are normally left to the chancellor to announce at the Budget (Autumn budget set for 27 October 2021) and as with the NICs increase, this means that no one can accurately say how much more anyone receiving a fixed rate dividend might actually pay.

Scotland

The announced changes will also apply to Scottish taxpayers.

Due to the Scottish NIC thresholds being linked to the UK, Scottish taxpayers with employment income between the Scottish and UK higher-rate Income Tax thresholds (£43,662 and £50,270 respectively in 2021/2022), will be liable to a marginal tax rate of 54.25% on that part of their income, from April 2022.

• This 54.25% marginal rate compares to a marginal rate of 33.25% for taxpayers elsewhere in the UK, in the same income bracket.

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