Dramatic tax rises to fund social care were unveiled by the government this week, sparking criticism from the self-employed and limited company directors.
From April 2022, national insurance contributions (NICs) will increase by 1.25 percentage points for employed and self-employed people earning more than £9,568. A similar increase will also apply to employers’ national insurance payments.
From April 2023, the higher NICs rate will apply to people working beyond the state pension age.
In a surprise move, Boris Johnson, prime minister, announced an increase in dividend tax — which will rise by 1.25 percentage points from April 2022.
There were some winners from the policy. People receiving only pension income will not be affected by the changes. Landlords who have not incorporated into a company will also be left untouched, along with investors holding wealth generated from capital growth, as opposed to those receiving dividends. Meanwhile, about 6.2m people earning less than £9,568 in 2021-22 will not have to pay the Health and Social Care Levy.
But for many — including about 29m people caught by the NICs increase — the new regime will mean a notable hit to the pocket, with the government itself warning the measures could have an impact on people just about managing to cope financially.
The increase in national insurance is focused on workers, since it only affects those with employment-related earnings. Currently, employees pay no national insurance on the first £9,568 earned. They pay 12 per cent on earnings up to £50,270 a year, falling to 2 per cent on earnings above £50,270 a year.
The increase means employees will now pay a rate of 13.25 per cent in the second band and 3.25 per cent on earnings above £50,270.
Helen Thornley, technical officer at the Association of Taxation Technicians, a professional body, said the NIC tax increase, coupled with the freezing of personal allowances announced at the March Budget would act as a drag on workers’ incomes. “It’s going to be a bit of a double whammy,” she warned.
Employees could also see lower wage growth as a result of higher NICs bills dropping on their employers’ desks, added Helen Miller, head of tax and deputy director of the Institute for Fiscal Studies.
Effectively this means employees were “facing two tax hikes”, Miller said. One unanticipated consequence of the measure might be businesses becoming less likely to employ people and more likely to use casual workers, who not require payment of employers’ NICs.
“Tax is skewing the labour market away from employment and there are no good reasons why,” Miller said.
The tax rise will also hurt self-employed people. Like employees, self-employed individuals paying class 4 NICs are not charged on the first £9,568 they earn. After this they pay 9 per cent on profits between £9,569 and £50,270, falling to 2 per cent on profits above £50,270.
The increase in NICs means self-employed people will from next year pay 10.25 per cent, falling to 3.25 per cent above £50,270.
Some groups of the self-employed will be hit worse than others. These include contract workers using agencies and “umbrella” companies — those that manage tax and pay on behalf of freelance workers.
Matt Fryer, head of legal services at Brookson Legal, said contractors’ rates often included the umbrella company’s costs, including employers’ NICs. “This means that umbrella company employees will be hit twice as hard in terms of take-home pay,” he said.
The tax move brings further pain to roughly 500,000 partners and sole traders who are already braced for changes to the way their profits are calculated.
Due to start taking effect from April 2022, these adjustments mean this group already faces paying accelerated tax. Paul Falvey, corporate tax partner at BDO, an accountancy firm, said adding the NICs increase on top would mean “some facing significant drops in their net income in the next few years”. He called on the government to give self-employed people more time to prepare.
Limited company directors
Limited company directors, who primarily pay themselves in dividends, say they will suffer disproportionately from the government plans.
Individuals will still be able to earn up to £2,000 in annual dividend income free of tax. Meanwhile those holding investments in wrappers such as pensions, individual savings accounts (Isas) and venture capital trusts will still enjoy tax-free dividends. But for limited company directors, who were left out of the government’s Covid-19 support packages, the increased tax will be a bitter pill to swallow.
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Nimesh Shah, chief executive of Blick Rothenberg, a tax and advisory firm, said the dividend tax rise indicated a stealth attack on limited company directors.
“The chancellor has not hidden his dissatisfaction towards the self-employed operating through limited companies, and the perception that this population pays less tax,” he said.
Rebecca Seeley Harris, a former senior adviser to the Office of Tax Simplification (OTS) who campaigned for increased Covid support for limited company directors, said the tax rise felt like “persecution”.
The Treasury said in a statement: “This is a fair increase, and it means those with dividend income — like business owners and investors — will be making a contribution in line with that made by employees and the self-employed on their earnings.
“Many landlords are incorporated and receive their rental income via limited liability companies in the form of dividends. These individuals will be affected by the increase to dividend tax rates.”