The National Insurance and Dividend Tax Hike – What it Means for You

Earlier this month, it was announced that National Insurance contributions and dividend tax would increase to pay for the spiralling costs of health and social care. This has been a controversial move, as the government promised, as recently as 2019, not to increase taxes.

5th November 2021

But we live in a very different world to pre-Covid times. While the pandemic is not responsible for every failing in health and social care, it has pushed already struggling services to their limits. It has also drawn attention to the extent of underfunding in the NHS and care homes.

Clearly, money needs to be found from somewhere, and an increase in tax rates was deemed to be the best option. It has been suggested that the move could raise around £12 billion per year to help fund health and social care1.

National Insurance
Currently, you pay National Insurance on your earnings if you are employed or self-employed, and under State Pension age. The rates are:

Employers also pay National Insurance, at a rate of 13.8% on behalf of their staff.

While National Insurance is separate from income tax, it is still a form of taxation.

National Insurance mainly pays for State Benefits. You need to accrue National Insurance contributions to qualify for the State Pension, statutory sick pay, maternity pay, or certain unemployment benefits.

Dividends are form of withdrawing profits from a company. You may receive dividends from your own business or from an investment portfolio which includes shares.

Currently, dividend tax applies as follows:

Dividends are not subject to National Insurance for the company or the recipient. This can make dividends an attractive alternative to salary when deciding how to draw your income.

What is Changing?
From April 2022, dividends and both forms of National Insurance (employee and employer) will increase by 1.25%.

From April 2023, a new Health and Social Care Levy will apply. This will still be 1.25%, but it will be carved out as a separate item. Unlike National Insurance, it will also be paid by anyone still working who is over State Pension age.

The increase will not affect anyone whose earnings are made up entirely of pension income or property rental.

How Much Additional Tax Will You Pay?
The extra tax will depend on how much you earn and how your income is made up. Some examples are shown below:

Some Options to Reduce Your Tax Bill
It’s unlikely that the new tax can be avoided entirely, and the concept of improving health and social care (providing this is carried out effectively, which is a whole other question) is one that few of us could argue with.

However, there are several ways in which you can improve your tax position:

Tax is a fact of life. We we must accept that the rules will change frequently, and sometimes mainly for political reasons. The best way of dealing with this is to ensure that your own affairs are arranged as efficiently as possible.

Please do not hesitate to contact a member of the team to find out more about tax planning.

1 National Insurance: What’s the new Health and Social Care tax and how will it affect me? - BBC News

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