National Insurance Contributions and dividend tax rates will increase by 1.25% throughout the UK from April 2022, with the calculated £12 billion annual tax on income increase to be earmarked to pay for health and social care.
The change to National Insurance contributions
National Insurance (NI) contributions will rise by 1.25 percentage points from April 2022. From April 2023, the new increases will be legislated separately as a ‘health and social care levy’.
This extends to individuals over state pension age in employment or self-employment, who are currently exempt from paying NI.
An example of how NI contributions will change with a 1.25% increase:
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- £50,000: £4,852 paid now; £5,357 with 1.25% increase = £505 extra each year
- £80,000: £5,479 paid now; £6,359 with 1.25% increase = £880 extra each year
- £100,00: £5,879 paid now; £7,009 with 1.25% increase = £1,130 extra each year
What does the dividend tax rise mean for investors?
From 6 April 2022, the tax paid on dividends above the £2,000 allowance will also increase by 1.25%. Only if your total income is more than your personal allowance, and you also exceed the dividend allowance, will you start paying tax on your dividends.
| Tax band | Tax rate on dividends over allowance | New rate |
| Basic rate | 7.5% | 8.75% |
| Higher rate | 32.5% | 33.75% |
| Additional rate | 38.1% | 39.35% |
It’s a stark reminder that tax rules can and will change. So, it’s best to shelter your investments from tax wherever possible by using a Stocks and Shares ISA or, a Self-Invested Personal Pension (SIPP) to wrap your investments.
If you are already maximising annual ISA and pension savings, VCTs can provide a useful source of tax-free dividend income as part of a diversified portfolio of investments. It is important to understand that these are high risk investments in small, illiquid, early stage businesses so they won’t be suitable for everyone.
Limited company owners
The move will impact employees and directors of small businesses, including the self-employed and contractors, who remunerate themselves partly or wholly through dividends rather than a salary
The difference between mainstream income tax rates and the dividend rate (20% vs 7.5% for basic rate) was looking unsustainable especially if you’re a business owner and opt to take lower salaries and more in dividends. This move continues to narrow the gap.
Looking at the bigger picture
The social care reform changes could have a much bigger impact on your finances. Especially if you or your family need long-term care.
This is an area where financial advice on long-term care could help. A long-term care conversation should also potentially include the wider family with the conversation extending to include lasting powers of attorney, family wills and potentially trusts.
