The Prime Minister announced that the government will introduce a new 1.25% Levy to provide an extra £12 bn a year to support the NHS and social care.

From April 2022, it is proposed that there will be a 1.25% rise in National Insurance Contributions (NICs) to be paid by both employers and workers. This will then become a separate Levy on earned income from 2023/24 – calculated in the same way as NIC and appearing on an employee’s payslip.

Note that the 1.25% increase also applies to the Class 4 contributions paid by the self-employed on their profits. Employees’ Class 1 NI contributions increase to 13.25% of earnings above £9,568, and the self-employed rate increases to 10.25%. The 3% differential remains for the time being, although there are rumours that the rates will align in the future. If earnings are £50,270, the rate will be 3.25%.

The employers Class 1 NIC rate will increase from 13.8% to 15.05% from 6 April 2022. However, many small businesses can set off the £4,000 employment allowance against their employers NIC liability. The proposed measures will also catch many workers operating through personal service companies to whom the new ‘off-payroll’ working rules apply.

DIVIDEND TAX RATES ALSO INCREASING FROM 2022/23

It is also proposed that there will be a 1.25% increase in the rate of tax payable on dividends received by those who own shares in companies. This would mean that after the £2,000 tax-free dividend allowance, the tax rate would be 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers and 39.35% for those with income above £150,000 a year. This will catch many family company directors/shareholders who traditionally pay themselves by taking a low salary and larger dividends to minimise NICs.

PLANNING ACTIONS BEFORE THE NEW RATES COMMENCE

The announcement of the proposed changes more than six months before they take effect means there’s time to reduce the impact. Employees could consider agreeing to a salary sacrifice arrangement with their employer, for example, sacrificing their £5,000 annual bonus for an additional pension contribution paid by their employer. Such an arrangement would save 1.25% NICs for both employee and employer and £2,000 income tax where the employee is a higher rate taxpayer. Employees might also consider a salary sacrifice in favour of an electric company car.

Shareholders/directors of family companies could consider bringing forward dividend payments before 6 April 2022. Such a strategy needs careful planning as if the extra dividend takes the taxpayer’s income above £50,270, the excess would be taxable at the 32.5% rate instead of the 7.5% rate, and the planning could backfire.