Employers, employees and the self-employed are planning for changes introduced by upcoming social care-related national insurance and dividend tax rises, and an eventual new Health and Social Care Levy.
Employers, employees and the self-employed face temporary increases in the national insurance they pay from April 2022 when primary Class 1 national insurance contributions (NICs) (paid by employees), secondary Class 1, 1A and 1B NICs (paid by employers) and Class 4 self-employed NICs will each rise by 1.25 percentage points.
Where an individual is employed, both the employee’s and their employer’s NICs will increase by 1.25 percentage points, making the rise in NICs payable in respect of that individual 2.5 percentage points in total. The same is not true for the self-employed, where total NICs payable per individual will only rise by 1.25 percentage points.
Then, from April 2023, these NIC rises will be reversed. A new 1.25% tax called the Health and Social Care Levy will be introduced instead, which will operate in the same way. For example, employers will continue to enjoy the same reliefs in relation to the Levy as they did under NICs - such as where an employee is under 21, an apprentice is under 25, or an employee is a veteran or works in a freeport.
Businesses will need to decide whether to absorb any extra NIC/Levy costs (resulting in reduced profits), make savings elsewhere in the business (for example, by reducing property costs, laying workers off or adjusting wages) and/or put prices up.
Another option for businesses with employed sales staff may be to consider appointing as sales agents, although this should not be done without specialist advice on the legal implications.
Dividend rates will also rise by 1.25 percentage points from April 2022, so that the basic rate increases from 7.5% to 8.75%, the higher rate from 32.5% to 33.75% and the additional rate from 38.1% to 39.35%.
Shareholder/directors of small limited companies, who often take part of their income from their companies as dividends rather than salary, may need to reconsider the relative proportions of each they take, or even convert to sole trader or partnership status.
The Treasury has published ‘Illustrative analysis of the impact of "Building Back Better": Our Plan for Health and Social Care on households' to show the immediate, short-term changes in income as a result of the increases in both NICs/the new Levy and dividend tax.
Employees can download the Treasury’s illustrative analysis from the GOV.UK website.
Paul Booth, Partner in Ramsdens Employment team commented: “Employers should consider how to take account of national insurance contribution rises and/or new Levy, including whether to engage self-employed agents and individuals receiving income from their companies in the form of dividends should consider the extent to which they continue to do this.”
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BY PAUL BOOTH
October 21, 2021
Paul is a Partner and Solicitor in the Employment and Litigation teams.