Is your business ready for National Insurance and dividend rises?

Major changes to National Insurance rates and tax on dividends are now just a few days away. Business owners and their directors need to act now to shape their future and ensure they are not to be caught out.

On 6 April 2022, National Insurance and dividend tax rates will increase by 1.25 percentage points. This will mean additional costs for businesses at a time when they are already facing financial pressures and increasing uncertainty.

Business owners who pay themselves by way of dividend will also face higher tax bills, although from 6 July 2022 a small saving will be made when the threshold at which an individual pays National Insurance will increase from £9,880 to £12,570.

Rachel Emmerson, Senior Accounts Manager, explains what is changing and its impact on businesses.

“From 6 April, National Insurance and tax on dividends will increase by 1.25 percentage points. This will mean the employer rate of NI will increase from 13.8% to 15.05%.

“Employees will also face an increase on Class 1 contributions, with the current earnings threshold of £190 per week taxed at 13.25% instead of 12%, and then at 3.25% on earnings over £967 a week. In the recent Spring Statement it was announced that the earnings threshold over which individuals start to pay NI will rise from £190 per week to £242 per week from 6 July 2022.

“Directors who often choose to pay themselves via a mix of salary and dividends will find themselves being taxed on dividends at 8.75% if within the basic rate tax band, at 33.75% if a higher rate taxpayer, and at 39.35% if an additional rate taxpayer.

Self-employed National Insurance rates are also increasing from 9% to 10.25% for annual profits over £11,908 and then from 2% to 3.25% for profits exceeding £50,270.

“The Government has been under increased pressure to delay the increase in National Insurance rates to help business cope with spiralling costs, yet the increase remains in place.

“Employers payroll systems will need to check that it is able and ready to manage these changes. Many cloud-based payroll systems will reflect these changes automatically, and I would advise looking into the eligibility of the annual allowance for businesses.

“Businesses that are worried about the additional cost may want to consider forecasting this and other increased costs and their impact on business profitability. A clear financial picture will help business owners prepare and respond.

“For Director’s it may be worth considering any bonus dividends to be declared pre increase, so before 5 April 2022, however the downside of this is that the tax payable will be accelerated and due by Jan 2023 instead of Jan 2024.”

For more information about the topic explored in this article, contact us here.