In September 2021, the government announced that from 6 April 2022 there would be an increase in national insurance contributions and dividend tax of 1.25%. This increase in NI is to pay for the impact of the pandemic on the NHS. It is thought that the increase will provide an additional £12 billion per annum to pay for social and health care.
National Insurance
Where will this increase be applied?
The key changes we will see across the employed and self-employed national insurance rates are:
- Class 1 (paid by employees) – from 12% to 13.25% on earnings from £9,881 up to £50,270 and from 2% to 3.25% on earnings above this level
- Class 4 (paid by self-employed) – from 9% to 10.25% on earnings from £9,881 up to £50,270 and from 2% to 3.25% on earnings above this level
It will also apply to the secondary class 1, 1A and 1B national insurance paid by employers. Employees or the self-employed who are over state pension age do not have to pay national insurance though employers do have to continue to pay employer’s national insurance for employees who are over state pension age.
Impact of tax rises
| Status | NI total 2021-22 | NI total 2022-23 | Increase |
| Employed salary £50,270 (basic rate upper limit) | £4,884 | £5,084 | £200 |
| Employed salary £100,000 | £5,879 | £6,701 | £822 |
| Self-employed taxable income £50,270 (basic rate upper limit) | £3,822 | £4,097 | £275 |
| Self-employed taxable income £100,000 | £4,816 | £5,713 | £897 |
The above is based on rates at the time this article was published.
Reminder: National insurance is paid on earnings and profits over the primary earnings threshold which increased to £9,880 (from 6 April 2022) from £9,568. There will be a further rise again from 6 July 2022 to £12,570 to align with the personal allowance.
Salary Sacrifice
As a result of the increase in national insurance rates, some employees may turn toward salary sacrifice arrangements to mitigate the national insurance increase but the new legislation will not allow this from 6 April 2023 because the increase in national insurance will become a separate ‘Health and Social Care (HSC) Levy’. This will see the levy stripped out of the NIC increase and become a standalone deduction with NICs reverting back to original levels. Therefore, any salary sacrifice benefit will be lost.
Business owners
National Insurance (Class 1A)
The rate of employer national insurance will also rise by 1.25% to 15.05% but existing reliefs to support smaller employers will also apply to the HSC Levy when introduced.
Dividends
The directors (and shareholders) of many owner managed companies have adopted a remuneration model of a low salary and the balance paid in dividends. However, the consequence of the increased dividend rates and the forthcoming rise in corporation tax to 25% from April 2023 will need to be considered when making future decisions on how to extract profits from a company.
We are advising that business owners start to give this immediate thought so please do reach out to your usual RG contact who will be able to discuss matters with you further.