Dividend tax and National Insurance hike for small businesses from April 2022

The Government has announced a sharp hike in National Insurance and Dividend Tax rates from April 2022 to help fund a new Social Care and Health Levy. How much will this cost small business owners?

The rates for both Employers’ and Employees’ NICs will both be increased by 1.25%. The same increase will apply to all dividend tax bands.

According to the Government, these joint measures are expected to raise £12bn per year.

What do these tax increases mean for small business people?

1. National Insurance Contributions

Whether you’re a sole trader (self employed), or trading via a limited company and pay yourself and any staff wages, you may be impacted by a 1.25% increase to Class 1 and Class 4 NICs.

Employees earning above the Class 1 primary threshold (£9,568 in the 2021/22 tax year), will pay an additional 1.25% on the existing Class 1 contributions.

Employers will also pay an extra 1.25% on their contributions – above the Class 1 secondary threshold (which is £8,840 during 2021/22).

So, if you run a limited company, you might potentially have to pay both – meaning a potential 2.5% increase.

If you’re self-employed and pay Class 4 NICs, you will pay an additional 1.25% on earnings above the lower profits limit (£9,568 during 2021/22).

2. Dividend Tax

The rates of dividend tax will also increase by 1.25% from April 2022 – matching the rise in NICs.

This means that the new rates will be as follows (previous rate in brackets).

• Basic Rate Taxpayer – 8.75% (7.5%)
• Higher Rate – 33.75% (32.5%)
• Additional Rate – 39.35% (38.1%)

The dividend allowance – which applies to the first £2,000 of dividend income – remains in place.

How has the small business world reacted?

Aside from the general debate over whether the Social Care & Health Levy not it is a good or timely measure, or whether or not the Prime Minister should have broken a manifesto pledge, there is genuine concern about the impact on many small businesses – particularly those excluded from the Chancellor’s COVID support measures.

Limited company owners who derive most of their income from dividends were ineligible for any of the COVID schemes, such as SEISS (which was available to the self-employed). However, thanks to the dividend tax rise, these same business owners will be helping to restore the Treasury’s coffers – despite receiving no support.

Limited company owners have also been subjected to a long list of punitive tax rises over the past 5 years or so, including a significant rise in dividend taxes in April 2016.

The Chancellor has also pencilled in a Corporation Tax rise – from 19% to 23% – from April 2023. This will represent another sizeable increase in tax on profits.

You can find some detailed information on the various tax rises announced this week, and the effect on existing rates, via the ICAEW.