1.25% increase to NIC and dividend tax rates
In an unprecedented move the government has confirmed that the 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. This breaks the Conservative’s manifesto pledge on raising taxes and illustrates the ongoing trend that the Conservatives are no longer the government of low taxes.
From 1 April 2022, there will be a temporary 1.25% increase in class 1 (employee) and class 4 (self-employed) national insurance contributions (NIC) paid by workers, as well as a 1.25% increase in class 1 secondary NIC paid by employers (so 2.5% in total).
The increase will apply to employed (include deemed employees) and self-employed individuals and partners earning above the class 1 primary threshold / class 4 lower profits limit (currently £9,568 in 2021/22). Employers will pay the additional 1.25% for employees earning above the class 1 secondary threshold (currently £8,840 in 2021/22). Existing reliefs and allowances from employer’s secondary class 1 NIC will apply to the levy including the £4,000 employment allowance, reliefs for employers of apprentices, newly employed veterans, and new employees in freeports.
From April 2023, the increases will be legislated separately as a “health and social care levy” and NIC rates will return to 2021/22 levels. The levy will be hypothecated in law, meaning that the revenues will be ringfenced for health and social care. From that date, the legislation will also extend the revenue raising measure to individuals over state pension age in employment, who are currently exempt from paying NIC.
The levy, including the temporary NIC increase in 2022, will be legislated for shortly so this is happening! Not only is this a tax increase but also an increase in the administrative burdens and costs for businesses with the need to amend payrolls from April 2022 and then again with the brand-new levy with effect from April 2023.
Dividend tax increase
Alongside the levy, which will be paid by employees, the self-employed and businesses, the government has announced a 1.25% increase in dividend tax rates from 1 April 2022, taking rates to: 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers and 39.35% for additional rate taxpayers. The £2,000 dividend allowance will remain.
The increase in dividend tax rates will be legislated for in the next Finance Bill and the government estimates that 70% of the revenue raised will be paid for by additional and higher rate taxpayers in 2022/23.
How the health and social care levy will apply from 2022
|Employee Class 1 NICs|
Main rate (i) / Higher
|Employer Class 1 NICs||Self-Employed Class 4
Main rate (i) / Higher
|NICs rates for 2021/2212%||12% / 2%||13.80%||9% / 2%|
|NICs rates for 2022/23||13.25% / 3.25%||15.05%||10.25% / 3.25%|
|NIC rates from|
|12% / 2%||13.80%||9% / 2%|
|Health and social care|
levy from 2023/24
|Threshold at which|
NICs become payable
Dividend tax rates and changes from 2022
|Basic rate taxpayers||Higher rate taxpayers||Additional rate tax|
|Dividend tax rates for 2021/22||7.50%||32.50%||38.10%|
|Dividend tax rates from 2022/23||8.75%||33.75%||39.35%|