All eyes were on Prime minister Boris Johnson on the 7th September as he set out the government’s plans for the health social care reform and a pledge breaking tax rise.  A 1.25% ‘health and social care levy’ and a rise in dividend tax were central elements announced to cover the costs of the £36 billion investment.

Although the announcement was not a complete surprise, it was still controversial. It is an unusual tax rise in that it has very broad scope. It covers all three of the main ways an individual would generate their income being employment, self-employment and limited companies.

And as usual, we have yet to see the detailed Government plans of how this will be applied.

Once we have further updates on the detail, we will update you and with the Budget announced for 27th October, we will certainly have more details for you then. If you’re not already signed up to our newsletter, sign up here.

In the meantime, we have put together our commentary and advice on how the increases in dividends and national insurance may impact your business and whether you’re now eligible for the new state pension and how to increase this.

Dividend tax increases

This is possibly the most controversial part of the change. This felt almost tagged onto the announcement but as director owners of small, limited companies received the least amount of help with their personal income through Coronavirus, this tax rise seems the most disingenuous.

The government clearly took a decision to not link these tax rises to the threat made in 2020

when the Self-Employed Income Support Scheme was announced that the self employed would face higher taxes. Instead, the basis on helping the NHS and care systems which are difficult, politically, to argue against.

From April 2022 the dividends tax rates will increase by 1.25% for all bands. This means for basic rate taxpayers; your dividend tax will increase from 7.5% to 8.75%.

For higher rate taxpayers, the increase is from 32.5% to 33.75%, with additional rate taxpayers (those earning over £150,000) seeing a rise to 39.35%.

If you earn £50,000 by a small salary and dividends, then this will be an annual tax increase of over £440. If you earn £100,000 by a small salary and dividends, then this will be an annual tax increase of over £1,060.

Most alarming though is that for basic rate tax payers paying 8.75% on their dividends on top of the 25% corporation tax due to affect limited companies from April 2023, this means they are effectively paying 33.75% tax on their earnings – a tax rate that is most applicable to those with small consultancy type limited companies.

The calculations for what is the best business structure to operate your business through will once again get more complex and harder to call.

National Insurance tax increases

From April 2022, national insurance contributions will increase for employees, employers and the self-employed by 1.25%

From April 2023, whilst the rises will stay the same, the tax rise will be branded as a health and social care levy, which will appear separately on tax records.

Under these rises, an employee earning £30,000 would face a reduction in pay of around £255 per year per month.

Given that personal allowance will not rise next year for the first time, many employees will enter the new tax year with a small pay cut, where usually they would get a small pay increase.

Employers will also face an increase in cost with a similar rise in cost for someone one earning £30,000. However, the only (slight) silver lining is this increase in tax cost is tax allowable so you will save in corporation tax (19% now, 25% in 2023) – but of course you will only see the tax saving at year end.

Our commentary on the National Insurance rise

Many commentators are predicting that this will put a brake on economic growth. And certainly, it will put pressure on limiting pay rises for many employers. More turmoil in the already difficult environment of HR and recruitment.

The other aspect to this is that National Insurance was brought in to provide social care. Primarily it was to enable the state to provide social care, like the state pension, from the very controversial “peoples budget” of 1909/1910. It was then expanded in 1945 to be part of the funding for the NHS. Adding this as a third type of tax as the “Health and Social Care Levy” from 2023 is seen by many as an over complication of our already complex tax system. In my mind it is like creating a tax to do the same job as the previous one. It will remain to be seen if HMRC even has the capacity to put this as a new tax by April 2023 anyway.

It has raised questions among some of our clients about the state pension. The intention of national insurance is to give you a “stamp” that provides access the state pension. It’s a tax that can have a direct correlation to a benefit for the tax payer. In light of this we have added some notes below about how you can check your own “stamp” for the state pension below.

With the tax rise, as ever, the devil will be in the detail. More details are set to be announced in the Budget on 27th October. We will cover this and all the relevant headlines and what they mean for you as businesses. If you’re not already signed up to our Budget newsletter, sign up here to ensure you receive it directly to your inbox on 27th October.

In the meantime, we have recorded an episode this week on the increase in taxes and the end of furlough and what these changes mean for your business. Make sure you’re subscribed to our Let’s Get Down to Business podcast to ensure you’re notified when it goes live Friday at 9am!

State pension changes

Boris also announced a one-year suspension of the ‘triple lock’ for annual state pension increases.

The ‘triple lock’ is a formula used to guarantee pensioner’s incomes rise by either September’s rate of inflation, earnings growth, or a guaranteed minimum of 2.5% – whichever is larger. But the government confirmed that the average earnings component would be disregarded in 2022-23 (as it was last year) and the rise will temporarily be replaced with a ‘double lock’ linked to either inflation or 2.5%.

This has had many of our clients asking if they’re eligible for the State Pension and if they have enough qualifying years, so we’d thought we’d put together our advice into an article below.

Are you eligible for state pension?

As a general rule, you’ll usually need at least 10 qualifying years on your National Insurance record to get the basic State Pension.

You’ll need 35 qualifying years to get the new full State Pension. The qualifying years do not have to be in a row.

If your qualifying years are in between 10 years and 35 years, then you will be eligible for a percentage of the full pension.

To get a qualifying year, this means at least one or more of the following applied to you:

  • You were working and paid National Insurance contributions
  • You were getting National Insurance credits for example if you were unemployed, ill or a parent or carer
  • You were paying voluntary National Insurance contributions

The recommended salary we suggest for directors means that you gain a qualifying year without having to pay any national insurance.

How to check your qualifying years

You can check your full pension years on the government website here.

This will also give you a projection on how much you could get and when you can get it based on you qualifying years.

How to improve your state pension

Depending on your age, you may naturally build your qualifying years through employment or self-employment.

Alternatively, if you are not earning enough, you can make voluntary contributions. This can be done for the current year, however if you are running out of time, then you can backdate the contributions for 6 years.

If you have any questions about national insurance and dividends tax changes and whether your eligible or how to increase your state pension, get in touch with your Principal Adviser who will be able to help you. Or call 01474 853 856 or email enquiries@a4g-llp.co.uk.

And don’t forget to subscribe to our Let’s Get Down to Business podcast wherever you get your podcasts.

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