National Insurance increases by 1.25%

You’d be forgiven for thinking that the recent headlines regarding the increase to National Insurance is in response to the Covid spending in 2020 and 2021.  However, it’s actually a Government measure to address the funding of the UK’s health and social care programme.

Broadly speaking, subject to the usual fine print, from 1 April 2022:

  • Employee Class 1 National Insurance (earned income) increasing from 12% (main rate) and 2% (higher rate) to 13.25% and 3.25%
  • Employer Class 1 National Insurance on salaries increasing from 13.8% to 15.05%
  • Dividend tax rate increasing from 7.5% (basic rate); 32.5% (higher rate); 38.1% (additional rate) to 8.75%, 33.75% and 39.35%

So what sounds like a rather innocuous “1.25%” increase (which absolutely true, in percentage point terms) can actually in the worst case be an effective 62.5% increase (Employee Class 1 higher moving from 2% to 3.25%).

What does it actually mean? Downing Street says an employed basic rate taxpayer earning the median basic rate taxpayer’s income of £24,100 in 2022/23 would contribute an extra £180 per year, while a higher rate taxpayer earning the median higher rate taxpayer’s income of £67,100 in 2022/23 would pay an additional £715.

For company directors with the flexibility of salary and dividend, these factors will need taking into account when working out how to extract profit from the business.  It will inevitably add a layer of complexity to the current default advice of ‘salary to personal allowance + dividends’ as being the most tax efficient (especially when also taking into account the increase in corporation tax from 1 April 2023 – see here).