There are two important tax increases being introduced from April. In this blog post, we'll look at how they'll impact you and your employees.
The two changes are:
- Increase to National Insurance rates of 1.25%
- Increase in Dividend Tax
Increase in National Insurance
You may recall that in the last Budget, the Chancellor announced an increase in National Insurance rates of 1.25%. This applies to both employee's NIC and Employers' NIC
How this change affects your Employees
From April payday, your employees will notice a decrease in their take-home pay, as you'll be deducting more NI from their salaries.
For someone earning £20,000 a year, the decrease will be about £11 a month
For someone earning £40,000 a year, the decrease will be about £32 a month
For someone earning £60,000 a year, the decrease will be about £53 a month
I would recommend speaking to your employees to warn them of this change. That way, they won't be surprised when it happens or bombard you with questions 😉
How this change affects you
Employers' Ni is increasing from 13.8% to 15.05%. This is a real cost increase to running your business!
If you employ someone on £20,000 your NIC cost will increase by £11 a month
If you employ someone on £40,000 your NIC cost will increase by £32 a month
If you employ someone on £60,000 your NIC cost will increase by £53 a month
Of course, this cost is per employee, so you'll also need to multiply up by the number of employees you have!
How to calculate the total cost of extra Employers NIC to your business
The easiest way to calculate how much this change will cost your business is:
- Get your employer's summary from this month's payroll. This document is sent to you during the payroll approval process each month
- Find the column labeled "Employers NIC" and take the figure at the bottom
- Divide that number by 13.8 and then multiply by 15.05. This will give you the new total NIC figure
- Subtract the figure in (3) from the figure in (2) and that will give you a good proxy for the increase (within a few £'s)
Your monthly PAYE payments to HMRC will appear a lot higher as you'll have both the above factors included in your payment to them. The real cost of employers NI plus the additional deductions from your employee's salaries. Of course, this second factor will actually be offset as the net salaries you pay employees will be lower.
Increase in Dividend Tax
Sneakily included in the Budget small print is an increase in dividend tax for dividends paid after the 1st April 2022. Dividend tax increase across the board
Basic rate Dividend tax (up to £50,000 total earnings) increases from 7.5% to 8.75%
Higher rate Dividend tax (Up to £100,000 total earnings) increase from 32.5% to 33.75%
This means that for someone earning £50,000 a year (to stay in basic rate), using a low salary + dividend extraction method, their tax bill will increase by £475 a year
With this news, it may be very tempting to bring some dividends forward to save a bit of tax. However, before making any decisions, it'd be worth remembering the following:
- Paying an additional dividend pre 31st March means you've to pay the tax on it a full year earlier
- The real extra tax is £125 for every £10,000 you withdraw. You need to consider if it's "worth it"
- Your company needs to have made enough profit for you to declare any extra dividends. If it hasn't, you could be creating more issues and the tax could potentially be much worse!
- Be very careful about breaching the £50,000 total income level. Not only do tax rates increase above this level, but you will also start to lose entitlement to Child benefits. Total income includes salary, dividend, rental income, P11D values