The last time I can recall a knee jerk reaction to the tax system like today was when Gordon Brown was calling the shots. Back then it was a reaction to his abolition of the 10p tax rate. Now it seems to be a reaction to having imbedded tax rises for the coming year but having had a bumper tax take so far this year he can unwind some of these tax rises, albeit very slightly. The problem is the tax rise in National Insurance and Dividend taxes is so tied in with the NHS funding that to cut it now would trigger headlines of cutting NHS funding.
This is why the tax system gets so complicated!

Changes to how much someone can earn before National Insurance is payable

It was announced that the level of income at which National Insurance (NI) starts to be paid is to be increased to match the Personal Allowance. Not since Gordon Brown scrapped the 10p tax rate and then had to back track on this has the NI and Income Tax 0% bands been aligned.

But there is a complication. This is clearly a last minute announcement and as a result, the increase in the “Primary Threshold” isn’t being changed until July. Although the headline is that NI won’t start until £12,570 of income is paid, it is actually being apportioned in the 2022-23 tax year. This means NI will be chargeable on salaries of more than £825 for the first three months of the tax year and then in July this increases to £1,047.50 per month.

As a result, employees with the same monthly gross pay each month will get a little extra in their net pay from July onwards. But for employers there are no changes to the NI bandings meaning that throughout the year the rate stays the same, £758 per month being the point at which employer’s NI becomes payable.

This causes a lot of complexity on the calculation of optimum salaries and dividends for limited company owners!

For businesses that operate as sole trade and partnership structures the point at which profits are applicable to the 10.25% Class 4 National Insurance has been increased to £11,908, increasing to £12,570 the following year.

Employers Allowance increasing to £5,000

Although for employers the increase in the National Insurance band doesn’t actually save tax for the business, there is one change that does help. The Employers Allowance, effectively a credit against the employers National Insurance costs, is increasing from £4,000 to £5,000 from April 2022.

The intention here is to make employing staff less onerous on smaller employers where this allowance can be quite lucrative.

An important factor to bear in mind is that if you are involved in multiple businesses with PAYE schemes this can only be claimed on one of your business’s payrolls. There have been checks made by HMRC in the past to ensure this isn’t being overclaimed so you need to be aware of the restrictions.

Health & Social Care Levy

Increase in National Insurance and Dividends Tax Rate

It was confirmed that the 1.25% increase in the National Insurance and Dividends tax rates will come into operation as planned.

See our tax table here for full details, but essentially:

  • Employees earning between £12,570 and £50,270 per year will pay National Insurance at 13.25% and anything over this at 3.25%
  • Employers will pay 15.05% national insurance on employee’s earnings over £8,840 per year
  • Dividends will be taxed at 8.75%  where the dividends are in the basic rate of tax (i.e., income is below £50,570 and a full personal allowance is given). There remains a £2,000 nil rate band for dividends, but this is does use up £2,000 of the basic rate band for income tax
  • Higher rate dividends will be taxed at 33.75% if taxable income is between £50,570 and £150,000. Any dividends above this are taxed at 39.35%

It is important to remember that for every £2 over £100,000 of total taxable earnings you lose £1 of personal allowance so for higher earnings further calculations may be needed.

It is also important to remember that dividends are always taxed at your highest rate of tax. Essentially, they are always considered last in calculating your tax liabilities.  Employment, rental profits and self-employment income are always assessed first and therefore are taxed at the lower band rates first. This can be an important consideration if you take employment for part of the year or drastically change your earning structure mid-tax year.

VAT Cut on Energy Efficiency

The VAT rate on energy efficiency supplies, such as solar panels and insulation materials, is being cut to 0%, which is essentially to stimulate consumer take up of these measures.

This may not affect your business in buying such goods if you are VAT registered. It will however benefit property developers and landlords because they can update their rental properties at a discount compared to previously.

This will apply from the 1 April 2022.

We are still working on the calculations to advise on recommended salaries for our clients who run businesses via limited companies but aim to get this out by the end of the week.
If you have any questions on anything announced, please speak to your Client Manager, or call us on 01474 853 856.