Get to grips with the 2022-23 National Insurance and Dividend Tax rates

2022-23 National Insurance and Dividend Tax rates

Get to grips with the 2022-23 National Insurance and Dividend Tax rates

As part of the new Health and Social Care levy, 2022-23 National Insurance (NI) and Dividend Tax rates have increased by a 1.25 percentage point as of 6 April.

Many businesses are getting to grips with the added complications to the payments of National Insurance Contributions (NICs) and dividends.

How have NICs changed because of the increase? 

The increase in NI affects the contributions made by employees, employers, and many self-employed workers.

Although the move intends to raise more than £12 billion for the NHS and social care system, businesses now face a sudden rise in employment costs.

Initially, the 1.25 percentage point NICs increase affects employed workers between 16years old and under state pension age, earning over £190 per week (rising to £242 in July 2022).

Self-employed with profits over £9,880 (rising to £12,500 from July 2022) or more than a year in self-employment also feel the impact. Although, the increase will not apply to Class 2 NICs.

This increase also applies to employer NICs minus any entitled business relief.

How are dividends changing?

Most businesses have favoured a balanced pay strategy for directors, which saw a larger proportion of their income paid through dividends versus a regular salary, to reduce the amount of tax and NICs the business is liable for.

Dividends are paid out of a company’s profits to its shareholders and every individual also receives help from a £2,000 tax-free allowance for dividend income.

Any dividends over this amount are taxed at different amounts depending on a person’s marginal rate.

Businesses do not pay any NICs on dividends, supplying a clear benefit to the company.

Before the increase in the Dividend Tax rate, most people were taxed as follows:

  • Basic rate – 7.5 per cent
  • Higher rate – 32.5 per cent
  • Additional rate – 38.1 per cent

However, as of the start of the new tax year, these rates are now as follows:

  • Basic rate – 8.75 per cent
  • Higher rate – 33.75 per cent
  • Additional rate – 39.35 per cent

From an employer’s NIC perspective, paying out more in dividends may make more sense given the upcoming changes.

However, those in receipt of dividends may not be as happy as it could affect how their income is taxed.

What about the changes to the NIC thresholds? 

Softening the blow of the NI rates increase, the Chancellor announced that the primary threshold (PT) for National Insurance is increasing by £3,000 from July, bringing it in line with the personal tax allowance of £12,500. 

However, the change does not affect the secondary threshold (ST). Employers will continue paying NICs at the same rate. 

However, the Chancellor has extended the annual Employment Allowance to eligible businesses (those with employers’ Class 1 National Insurance liabilities less than £100,000 in the previous tax year) by an additional £1,000 a year to £5,000.

The Treasury has said that the changes to thresholds will help cut up to £6 billion worth of NICs – cutting the NIC bill for the ‘typical employee’ by around £330 a year.

Although representing a saving, in reality, much of this ‘tax cut’ is taken up by the rise in NI rates.

Do you have any questions on the 2022-23 National Insurance and Dividend Tax rates? Our employment tax advisors or payroll experts can help, get in touch.

Links: Four things to know about National Insurance contributions and the April increase