The effects of the levy on dividend rates in April 2022 and how this affects small business owners

The government recently announced a rise in National Insurance and dividend tax rates that’ll come into force from April 2022 onwards, with an aim of raising the much needed funds for the new Social Care and Health levy. So what does this mean for Limited Company contractors, and how will they be affected?

In this blog we explore just that, to help you prepare for the impending changes.

What’s changing?

The same 1.25% rate of increase will apply to both Employers’ and Employees’ NICs, and dividend tax bands. These increases are estimated to bring in an extra £12 billion per year.

What does this mean for Limited Company contractors?

National Insurance Contributions (NICs)

As a Limited Company contractor paying yourself a wage, you could be affected by the 1.25% to Class 1 and Class 4 NICs. If you’re earning above the Class 1 primary threshold of £9,568 in tax year 2021/22, you’ll pay an additional 1.25% on the existing Class 1 contributions.

If you employ people within your Limited Company, you’ll also pay an additional 1.25% on your contributions above the current Class 1 threshold of £8,840 for the tax year 2021/22. So you could potentially end up having to pay an additional 2.5%.

If you pay Class 4 NICs you’ll have to pay an additional 1.25% on any earnings above the lower profits threshold of £9,568 in 2021/22.

The increase in dividend tax

Dividend tax will also increase by 1.25% from April 2022, therefore the new rates will be as follows:

• Basic Rate Taxpayer – will increase from 7.5% to 8.75%
• Higher Rate Taxpayer – will increase from 32.5% to 33.75%
• Additional Rate Taxpayer – will increase from 38.1% to 39.35%

Whilst these increases are an unwelcome addition, the dividend allowance of the first £2,000 of dividend income, remains unchanged.

How much extra can you expect to pay?

Example – salary of £8,840 and dividends using up the full basic rate band

If your salary is £8,840 and you take out the maximum amount of dividends available to you, then you can expect to pay an additional £450 from April 2022 onwards. This equates to the extra 1.25% on your dividends in the basic rate band.

Example – if you take dividends in the higher rate threshold

You can expect to pay around an additional £12.50 per £1,000 of dividends taken within that tax band.

How Limited Company contractors have reacted to the announcement

Sadly, during the pandemic Limited Company contractors were exempt from receiving any financial help from the government, particularly in the form of the SEISS Scheme which was made available to other self-employed people. Many feel it’s greatly unfair that this new rise in dividend tax is partially being used to pay for this scheme which they never had access to, and are understandably upset by the government’s decision.

Limited Company contractors have be in the line of fire for a number of years now, with the IR35 reform earlier this year, and a significant dividend tax increase back in 2016. The Chancellor of the Exchequer has also announced a Corporation Tax increase from 19% to 23% in 2023. This will, once again prove to make a sizable dent in contractor’s profits in the form of tax.

How SG Accounting can help you prepare

Whilst we can’t make the Chancellor reduce taxes, we can ensure we’re prepared for when the increase comes into play. We always work towards making you as tax efficient as possible, but if you’d like to talk to us specifically about this matter, then please do arrange a time to discuss this with your associated Client Director.