The Incoming NIC and Dividend Tax Rates

The government has announced an extra tax to fund social care in England and to help the NHS recover after the pandemic.

There will be a 1.25% rise in National Insurance Contributions (NICs) from April 2022 paid by both employers and workers and will then become a separate tax on earned income from 2023 – calculated in the same way as NIC and appearing on an employee’s payslip. Note that the 1.25% increase applies to the Class 4 contributions paid by the self-employed on their profits as well as the Class 1 contributions paid by employees increasing the rates to 10.25% and 13.25%. The employers’ Class 1 rate will increase from 12.8% to 14.05% however many small businesses are able to set off a £4,000 employment allowance against their employers’ NIC liability.

Many workers operating through personal service companies to whom the new “off-payroll” working rules apply will also be caught by the proposed measures.

The 1.25% additional levy doesn’t just apply to national insurance contributions, it is proposed that the income from share dividends, earned by those who own shares in companies, will also see a 1.25% tax increase. This would mean that after the £2,000 tax-free dividend allowance the rate of tax would be 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers, and 39.35% for those with income in excess of £150,000 a year.

Note that those above State Pension Age who are earning or self-employed will start paying NIC and the new Health and Social Care Levy from 2023/24.

Details of the proposals are set out in the following document: 6.7688_CO_Command paper cover_060921 (publishing.service.gov.uk)

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