From April 2022, in line with announcements made last month, National Insurance Class 1 contributions (that will affect employed persons and their employers) and Class 4 contributions (that will affect the self-employed), are increasing by 1.25%.

These increases will affect all employed and self-employed workers that presently pay National Insurance.

This increase will only apply to NIC rates for one year. From April 2023, the 1.25% increase will be removed from Class 1 and Class 4 NIC rates and a new tax is being created to be known as the Health and Social Care Levy (HSCL).

The HSCL will appear as a separate item on payslips and tax statements for the self-employed. The Levy is the closest the UK will have to a hypothecated tax – a tax levied and applied to a specific funding objective, i.e., funds for the NHS and social care budgets.

Whilst payroll software providers will already be making changes to their code to accommodate this new tax, it will be interesting to see if HMRC can adapt their systems in time for the April 2023 launch date.

Many smaller company employers, those that can claim the £4,000 employment allowance, will likely escape payment of the 1.25% increase in employers’ Class 1 contributions. However, the increase will also apply to Class 1A NIC employer contributions and these are not covered by the employment allowance.

Note: Class 1A NIC is payable on the value of taxable benefits provided by employers and is levied at the end of each tax year.

If you have been keeping up with announcements from Downing Street, you will know that from April 2022 the hybrid rates of Income Tax on dividend income are increasing by 1.25 percentage points.

The changes from April 2022 are:

• The first £2,000 of dividends received are free of any additional tax charge, no change here.
• If you are a basic rate tax payer, your dividend income in excess of £2,000 will be taxed at 8.75% (presently 7.5%).
• If you are a higher rate tax payer, any dividend income that falls into the higher rate band will be taxed at 33.75% (presently 32.5%).
• If you are an additional rate tax payer, any dividend income that falls into the additional rate band will be taxed at 39.35% (presently 38.1%).

Even with these increases, it is likely that director/shareholders adopting the high dividend, low salary strategy will still save on NIC costs.

Savers who have their funds in tax-exempt wrappers, ISAs for example, will be unaffected.

Other savers would need to have fairly significant portfolios outside tax exempt investments in order to pay any dividend tax. With average dividend yields running at approximately 3.5%, you would need to have a portfolio in excess of £57,000 to breach the £2,000 tax-free limit.