National Insurance hike: From dividends to salaries – what it means for your money
The government has announced that it intends to hike National Insurance payments by 1.25% from April next year.
The change will take effect from the new tax year, 6 April 2022. It will have an impact on anyone in employment, self-employment and those over state pension age but still in work. Workers’ wages, investment incomes and anyone who takes an income via dividends will be affected.
The government says it is raising the tax in order to help fund the cost of social care, while also using some of the cash in the short term to clear the backlog of NHS patients caused by the pandemic.
How much will I pay?
When it comes to extra tax on salaried income – a basic rate payer who earns £24,100 a year would be £180 worse off after the NI hike in 2022-23. A higher rate payer on a wage of £67,100 would contribute £715 more in the same period.
What about dividends?
The government says it will also increase the tax paid on dividends to help fund the cost of social care. The current tax-free allowance for dividend income is £2,000 per tax year. Above this, basic-rate taxpayers have to pay 7.5% tax on dividend income. This will rise to 8.75%. Higher rate and additional rate payers will see dividend taxes rise to 33.75% and 39.35% respectively.
Are limited company owners affected?
The move will also affect anyone who owns a limited company. Many adopt this structure as a way to pay themselves an income via dividends, as the rates are generally speaking around 5% lower than income taxation. Anyone who takes a salary from their company and dividends too faces a double hit of extra taxation.
If you would like to discuss the National Insurance rise, please don’t hesitate to get in touch with your professional connections’ financial adviser contact.