These changes will apply across the UK and are not impacted by the Scottish rates of income tax. From April 2022, there will be a temporary 1.25 per cent increase in national insurance contributions (NICs) paid by employees, the self-employed and employers. The increase will apply to main and higher rate NICs and revenue will be added to the existing NHS allocation.
From April 2023, the 1.25 per cent levy will become a separate tax with revenues ring-fenced for health and social care and NICs rates will return to their previous level. From April 2023, the Levy will also apply to those in employment above State Pension age, who are currently exempt from paying NICs.
The increase will apply to employed and self-employed individuals earning above the Class 1 primary threshold and Class 4 lower profits limit (currently £9,568). Employers will pay the additional 1.25 per cent for employees earning above the secondary threshold (currently £8,840).
The increase will not apply to Class 2 NICs (the flat rate paid by the self-employed with profits above the Small Profits Threshold, currently £6,515 per year) or Class 3 NICs (voluntary contributions for taxpayers). Existing reliefs to support employers will also apply to the levy. The Government’s paper confirms that in 2022/23 the Levy will result in a taxpayer with a median basic rate income of £24,100 paying an additional contribution of £180. A taxpayer with a median higher rate income of £67,100 will pay an additional £715.
As the Employment Allowance will continue to apply to small businesses, the Government estimates that around 40 per cent of businesses in the UK will not be impacted by the Levy.
The next 40 per cent are expected to face an average increase of £450 per year. Seventy per cent of the revenue raised from businesses is expected to come from the largest one per cent of businesses in the UK.
From April 2022, the rate of dividend tax in all income bands will also increase by 1.25 per cent. This measure is intended to bring the contribution of business owners and investors in line with that made by employees and the self-employed. As with the Levy, the revenue raised from the increased rates will be ringfenced to fund health and social care.
The new tax rates for dividend income will be 8.75 per cent for basic rate taxpayers, 33.75 per cent for higher rate taxpayers and 39.35 per cent for additional rate taxpayers. The first £2,000 of an individual’s dividend income will continue to be charged at zero per cent (the Dividend Allowance) and dividends received through ISAs will remain tax-free.
The Government estimates that in 2022/23 basic rate taxpayers are expected to pay, on average, an additional £150 on their dividend income and higher rate taxpayers an additional £403. Additional and higher rate taxpayers are expected to contribute over 70 per cent of the revenue from the increased rates.
Business owners who withdraw profits by way of dividends are likely to be among those most affected by the increased rates. This is in conjunction with the planned increase in corporation tax from 19 to 25 per cent in April 2023.
Beth Evans is a Senior Solicitor, Turcan Connell