On 7th September, PM Boris Johnson announced a 1.25% NI rate rise for workers and employers to fund health and social care in England for the 2022/23 Financial Year
PM outlines social care funding aim with National Insurance rate rise and tax on share dividends
In a controversial move, Prime Minister Boris Johnson has announced that, for the financial year commencing April 2022, there will be a UK-wide 1.25% National Insurance (NI) rate increase. Funds garnered from the rise are to be put towards the health and social care sector. Although it has received criticism and broken a manifesto promise not to raise National Insurance, income tax, or VAT, MPs voted on September 8th for the measures to be implemented from April 1st, 2022.
This will be accompanied by a 1.25% increase on taxes for share dividends, projected to raise £600m. Thus, if you own shares in a company and receive dividend payments from these, you will be required to pay an extra 1.25% tax on any income that is above the £2000 tax-free allowance.
These increases are temporary measures, with the extra 1.25% NI contributions being legally ringfenced to raise up to £12bn for health and social care between 2022-23. From 2023, this increase will be separated from NIC – which will return to its current rate – and be rebranded as the ‘Health and Social Care Levy’ on payslips, essentially functioning as a brand new, additional tax.
How will the 2022 NI rate rise affect workers and businesses?
| Tax Year | Employee
Class 1 NICs |
Employer
Class 1, 1A, 1B NICs |
Self-Employed
Class 4 NICs |
| 2021-22 | 12%
2% |
13.8% | 9%
2% |
| 2022-23 | 13.25%
3.25% |
15.05% | 10.25%
3.25% |
| 2023-24 | 12%
2% |
13.8% | 9%
2% |
With NI payable upon earnings of more than £9,568pa (£797pm) for employees, £8,840pa (£737pm) for employers, and profits of over £6515 for the self-employed, workers will be most affected by these changes.
Business groups have echoed this, in particular stating how higher employer NICs will place an increased burden on employers and require consideration of how to manage rising costs, with salary sacrifice a potential future move.
The director of the Institute for Fiscal Studies (IFS), Paul Johnson, has stated that younger generations and lower-income workers will be disproportionally affected by the NIC increase and highlighted that raising income tax instead would spread the burden more evenly.
Effect on different wage bands in 2022-23
| Wage Band (Per Year) | Current NICs Per Year | Increase Per Year |
|
£20,000
|
£1,251 |
+ £130 |
|
£30,000
|
£2,451 |
+ £255 |
|
£50,000
|
£4,851 |
+ £505 |
|
£80,000
|
£5,479 |
+ £880 |
|
£100,000
|
£5,878 |
+ £1,130 |
It is suggested that, wherever possible, a generic message regarding the 2022-23 NIC increase should be included on payslips, although more information will be available on this in due course.
Dividend Tax
As stated, a 1.25% tax on dividend income exceeding £2000 accumulated from ownership of company shares will also be introduced April 1st, 2022. This appears to be a sweeping change across businesses, with no discernible difference outlined between owner-managed companies and larger corporates.
Despite the increase, dividend tax rates will nevertheless remain lower than corresponding income tax rates: 8.75% (basic rate); 33.75% (higher rate); and 39.35% (additional rate).
Additionally, dividends will continue to be preferable to salaries when it comes to deducting from company profits, particularly for higher earners. This is despite a planned 25% increase in corporation tax in 2023. As such, employers may consider share option schemes as opposed to bonuses for higher earners.
The Health and Social Care Levy 2023
| Tax Year | Employee | Employer | Self-Employed |
| Health and Social Care Levy
2023-24 |
1.25% |
1.25% |
1.25% |
Over the next 3 years, the NIC increase – switching to a 1.25% Health and Social Care levy in 2023 – is set to raise £36bn to ease the backlog to NHS waiting lists and hospital capacity caused by the pandemic.
While those working over the State Pension age are not required to pay NI and will be exempt from the 2022 NIC increase, from April 2023, the 1.25% Health and Social Care Levy will be extended to include this group. Therefore, as State Pension age increases and people work longer, continued contribution will be expected.
Levy contributions will be administered by HMRC and collected via current reporting and collection procedures: Pay As You Earn (PAYE) and Income Tax Self-Assessment.
For the tax year 2023-24, Health and Social Care levy contributions will be required to appear as a separate tax on payslips. This is likely to increase the administrative burden on payroll staff, in addition to overall business costs, as the NIC amendment will need to be listed on payslips from April 2022 and subsequently altered to reflect the new levy coming into effect April 2023.
If you would like any help in understanding how PKF Smith Cooper can help you to minimise your risks of underpaid tax and NIC, please contact our Personal Tax team or Employment Tax team.
