NIC & Dividend rate increase

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As part of the government’s plans for health and social care, the Prime Minister announced NIC and dividend income tax rate increases earlier this week. It is really quite unusual for tax changes to be announced by government outside of a Budget or a spending review statement.

We summarise these below.

Overall, from 6 April 2022:

  • There will be an increase of 1.25% in the rate of class 1 NIC for employees and employers;
  • There will be an increase of 1.25% in the rate of class 1A NIC and class 1B NIC (paid by employers on chargeable benefits-in-kind and items forming part of a PAYE Settlement Agreement respectively);
  • There will be an increase of 1.25% in the rate of class 4 NIC for the self-employed; and
  • The income tax rates on dividend income will increase by 1.25%.

Comparisons to the current dividend income tax rates are:

Marginal income tax bandCurrent dividend income tax rate*Dividend income tax rate from 6 April 2022*
Basic-rate7.5%8.75%
Higher-rate32.5%33.75%
Additional-rate38.1%39.35%

*Where dividend income exceeds the available dividend allowance

The mechanics are different for the 2022/23 (first year of the changes) and subsequent tax years (2023/24 onwards) for the NIC increases. In 2022/23 they will merely be NIC increases, however, in subsequent years the increase will be a separate Health and Social Care Levy, with the NIC rates reverting to the current rates.

2021/22 (Current) rates2022/23 rates2023/24 rates
Class 1 NIC – Employee12%/2% (main rate/higher rate)13.25%/3.25%12%/2%
Class 1 NIC – Employer13.8%15.05%13.8%
Class 4 NIC (Self-employed)9%/2%10.25%/3.25%9%/2%
Health and Social Care Levy (Employer and Employee)1.25%1.25%
Class 1A and 1B NIC13.8%15.05%13.8%

 

Working pensioners (those over State Pension age) will also pay the Levy from 6 April 2023, whilst not being required to pay NIC.

It has been confirmed that existing reliefs and allowances relating to employer’s class 1 NIC, such as the Employment Allowance, will apply to the Levy.

The dividend allowance will also still apply.

As the dividend income tax rates will increase from 6 April 2022, it presents a planning opportunity to pay relevant (and sizeable enough) dividends before the end of the current tax year. It also may be an opportune point for limited company shareholders to consider their cash extraction strategy. Our briefing note discussing options for the current 2021/22 tax year can be found here.

Given its introduction, it will be very interesting to see whether the Levy is expanded to other sources of income in the future. Once such a new tax is introduced, it is obviously then easy to increase – will we see an increase in the rate in the near future?

We will await to hear of further tax changes when Rishi Sunak announces the government’s tax and spending plans as part of the Autumn Budget and Spending Review announcements on 27 October 2021.

Social care

After the ‘take’ of the above announcements, the ‘give’ announced by the government to try and soften the blow was a lifetime cap on care costs of £86,000.

Under these announcements, it appears that:

  • Up to the £86,000 cap, those with more than £100,000 in assets will have to pay for all their own care costs;
  • Those with between £20,000 and £100,000 will have their funds partly subsidised by local authorities; and
  • Those with less than £20,000 will not have to pay any costs.

Details on this ‘cap’, however, are limited and a lot requires further clarification.

For example, various media sources have reported that the government confirmed to the BBC that the cap would not include accommodation-related costs, but this was not mentioned in the government’s documentation announcing the plan. If correct, significant costs would not be included that did not specifically relate to ‘care’ e.g. food, accommodation etc.

There are other points to consider here:

  • The cap will only apply where councils deem someone to need care and assistance – a process currently fraught with issues (you would have to expect that this is unlikely to change);
  • Costs incurred before October 2023 will not count towards the cap;
  • How costly will this plan be to administer? Will the benefit to the Treasury of the new tax and NIC increases be merely spent on the administration of the plan?