In a move that breaks the Conservative’s manifesto pledge on raising taxes, the Government has confirmed that rates of national insurance are to be increased to pay for the impact of the coronavirus pandemic on the NHS and to address the long-standing funding gap for health and social care.
Impact of tax rises
These changes will be paid for by a rise in national insurance for employees and the self-employed with pay or profits over the primary earnings threshold (currently £9,568), and a rise in the dividend rates of tax.
Someone with a salary (or profits) of £50,000 will face an additional national insurance charge of £505 a year, rising to £1,130 at a salary of £100,000. It should also be noted that from 6 April 2023 the extra 1.25% will also be payable by those still working and over State Pension age.
The dividend ordinary rate, upper rate and additional rate will also increase by 1.25% to 8.75%, 33.75% and 39.35% respectively. There will be nothing to pay if dividends fall within the personal allowance and/or the 0% band of £2,000.
It is therefore going to be even more important to ensure that those with larger equity-based shareholdings make the most of ISAs or pensions to protect savings from income tax and capital gains tax. Couples should also ensure where possible that assets are split to make the most of personal allowances and tax bands if necessary.
Some employees may turn toward salary sacrifice arrangements to mitigate the national insurance increase, but it is not yet known whether the new legislation will allow this, particularly given that from 6 April 2023 the increase in national insurance will become a separate ‘health and social care Levy’.
For those who already benefit from a salary sacrifice arrangement it may well be that any additional sacrifice is not worthwhile, but for those who have no sacrifice arrangements in place, this could be an incentive to consider entering into an arrangement to save ‘normal’ national insurance, but care must be taken not to fall foul of the rules regarding optional remuneration arrangements.
Salary sacrifice in exchange for increased pension savings can be very tax efficient and bolsters retirement provision, even if it does not affect the new Levy.
The rate of employer national insurance will also rise by 1.25% to 15.05%, however, existing reliefs to support smaller employers will also apply to the Levy when introduced.
One of the reasons many business owners take their profits as dividend is because, unlike salary, they are not subject to national insurance, but the increase in the dividend rate coupled with the rise in corporation tax to 25% from April 2023 could have a significant impact when making future decisions on how to take profits.
It may be advantageous to consider accelerating dividends before the increases come into force on 6 April 2022 and the tax rise could strengthen the arguments for taking profits as an employer pension contribution, subject of course to the annual allowance limits.
The dividend rates for trusts are not specifically mentioned by the Government, however, the rates are linked to the dividend ordinary rate and dividend additional rate and are expected to increase in line with the individual tax increase.
So, any dividends falling in the first £1,000 of trust income will be taxed at 8.75%, with the remainder at 39.35%.
For trustees accumulating income, this will have an additional drag on returns, but for trustees who like to pay out the full dividend to beneficiaries, there should be no noticeable difference apart from the tax administration.
Dividends will still have to be paid as ‘trust income’ after accounting for tax at 45% and beneficiaries will still receive a tax credit of 45% which they will be able to use to reclaim some or all of the tax paid, depending on their personal tax status.
A Budget is scheduled for 27 October 2021 and it should provide more detail on how the Levy will work in practice, however, please do not hesitate to speak to your usual RG contact should you wish to talk through the above.