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National Insurance and...

16 September 2021

3 min read

National Insurance and dividend tax rises – what you need to know

The Prime Minister has announced plans to raise National Insurance rates by 1.25 percentage points for employers and employees, with tax on share dividends rising by the same amount.

Katharine Lindley
Katharine Lindley,

Head of Advice & Chartered Financial Planner

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:

    • £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.

Katharine Lindley

Katharine Lindley

Head of Advice & Chartered Financial Planner

Katharine started her career in 1998 in PwC’s financial planning team. She joined EQ Investors from Tilney Bestinvest where she worked closely with investment managers and professional advisers to deliver cohesive financial plans for clients. Katharine’s areas of expertise are wealth management, retirement planning and pensions, investments, estate planning and tax planning. She is a Chartered Financial Planner, Certified Financial Planner, Taxation Technician Fellow and Chartered Tax Adviser. Away from the office, Katharine enjoys spending time with family, gardening, theatre and is learning the piano after a 30 year break. Katharine is a charitable trustee of the Association of Taxation Technicians and represents them on technical pension discussions with HMRC and HM Treasury.


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