National Insurance increase and introduction of Health and Social Care Levy
The Health and Social Care Levy is a 1.25% charge payable by employers and their employees on earned income and is scheduled to begin on 6 April 2023 under a Bill debated briefly in the Commons on Tuesday 14 September. In an effort to bring funding forward, a 1.25% increase to employer’s and employee’s National Insurance will apply for the year 6 April 2022 to 5 April 2023.
Taxpayers of pensionable age are not subject to National Insurance (NI) but will be subject to the levy if they receive earned income that would be subject to NI but for their age.
As NI is not a progressive tax (a decreasing proportion of an individual’s salary goes to NI as their salary increases above £50,268), increasing it has met with controversy, appearing to hit middle- and low-income groups hardest.
The upside (if there is one) is that increasing tax on earned income also increases the economic benefit of remuneration devices that relieve this tax, such as share options and salary sacrifice schemes.
Increase to Dividend Tax
In what can be described as (at best) a crude attempt at parity, the Government also announced an increase of 1.25% to tax on dividends from 6 April 2022. The whitepaper states it is “a fair increase, and it means that those with dividend income, like business owners and investors, will be making a contribution in line with that made by employees and the self-employed on their earnings.”
This framing ignores the 1.25% Health and Social Care Levy that employers will be paying, although the levy will largely be recovered for those companies subject to the April 2023 corporation tax increase (the increased expense reducing corporation tax due). However, the levy will be payable earlier than corporation tax and will act to reduce operating profit. The corporation tax rise may also see an overall cut to distributable profits before they reach the hands of business owners and investors.
Taken together the measures are likely to see an increase in profit extraction from companies in the run up to April 2022, either by bonus payments or dividends, to prevent taxation at the increased rates. Anti-avoidance provisions to prevent artificial acceleration have not yet been publicised but will no doubt follow with the Budget on 27 October or soon thereafter.
Those looking at the benefits of incorporation will still require careful modelling to assess the tax impacts, despite Government attempts at fairness.
The next step
For more information, get in touch with John Mosford at email@example.com or via 0161 236 6936 or contact your usual UHY adviser.