The Employment Allowance has risen from £4,000 to £5,000 – meaning smaller firms will be able to claim up to £5,000 off their employer National Insurance Contributions (NICs) bills.

Announced by the Chancellor at last month’s Spring Statement to reduce employment costs, the change takes an extra 50,000 firms out of paying NICs and the Health and Social Care Levy. This increases the total number of businesses not paying NICs and the Levy to 670,000.

According to the Chancellor, 94% of businesses benefitting from the £1,000 increase are small and micro businesses, and the sectors that will see the highest numbers of employers benefitting are the wholesale and retail sector (87,000); the professional, scientific and technical activities industry (63,000); and the construction sector (52,000).

Note, the Employment Allowance only covers employers’ NIC contributions.

Dividends are a distribution of company profits to shareholders. Historically, they have been taxed as unearned income – no National Insurance deductions.

This is still the case, but the Treasury have decided that the recent increase of 1.25% in National Insurance rates will also apply to dividends.

Since April 2016, the rates of Income Tax applicable to dividend income have been 7.5%, 32.5% and 38.1% for basic, higher and additional rate taxpayers, respectively.

Any individual who has dividend income can benefit from the dividend allowance which has been set at £2,000 since April 2018. Dividends within the allowance are not charged to tax and this will remain the case.

For 2021-22, the ordinary rate, upper rate and additional rate were 7.5%, 32.5% and 38.1% respectively. These rates increased by 1.25% to 8.75% 33.75% and 39.35% from April 2022.

The dividend trust rate of Income Tax was 38.1%, 2021-22. This also increased to 39.35% from April 2022 to remain in line with the additional rate.

Although the 1.25% increase sounds fairly insignificant, a basic rate taxpayer with £22,000 of dividend income would pay £1,750 tax in 2022-23. The equivalent tax due for 2021-22 was £1,500. The increase of £250 represents a 17% increase in tax due even though rates have only increased by 1.25 percentage points.

Director/shareholders of small companies who have adopted a high dividend, low salary approach will see continuing benefits from this strategy, but fine-tuning remuneration packages to include the new rates may be beneficial.