Increase in NI and dividend tax – what does this mean for me?
The Prime Minister has announced that for the 22/23 tax year, national insurance rates, and dividend rates will increase by 1.25%. Grammatically this is correct but is mathematically misleading. For a basic rate taxpayer, the tax rate on dividends is 7.5%. This will rise to 8.75%, which is an increase of 16.7%. The employed rate of NI is 12% and will rise to 13.25% this represents a 10.4% increase. These are very significant increases, in real terms far above the 1.25% as reported.
So, what does this mean for the director on a tax efficient 50k remuneration?
The above figures are for individuals. It shouldn’t be forgotten that employees NI is also increasing from 13.8% to 15.05%. For small employers who claim the employment allowance of £4000 and where the £4000 continues to cover all of the employers NI there will be no noticeable difference, however, for those paying employers NI, they will see a significant increase in the NI costs of their workforce.
So, what can we do to mitigate these increases? On the face of it not a lot. However, there are a few measures we can take:
1) Don’t take more dividends than you need to. This needs to weighed against the risk of keeping additional funds in the company.
2) When recruiting, two part time positions rather than one full time position may help to reduce or eliminate any additional employers national insurance.
3) Ensure you are using alphabetical shares appropriately (i.e. use wife and husbands allowances).
4) Ensure all expenses are claimed as this may reduce the amounts of dividends taken.