No surprises when the Prime Minister announced a hefty 1.25% increase in NIC Class 1 and Class 4 rates from April 2022. The announcement was widely predicted.
Effectively, this is a tax increase on earnings (employed or self-employed) and on costs for employers. It is odd that a 1.25% increase in Income Tax would have created a virtual storm of protest, not only from Conservative politicians and voters aggrieved by the back-peddling on election promises, but by tax payers generally. Whereas, an equivalent increase in National Insurance sails through parliament with hardly a ripple from back-benchers on the blue side of the room.
The Treasury seem wedded to this belief, that a rise in NIC is to be preferred to a rise in Income Tax.
So how will this increase affect business owners?
Employees will bear the brunt of this increase. Smaller employers may escape liability for employers’ contributions by claiming exemption proffered by the Employment Allowance (EA). The EA exempts employers from their Class 1 contributions if they do not exceed £4,000 in the current tax year.
Unfortunately, employers will have to pay the increase in Class 1A NIC which is payable as a fixed percentage of taxable benefits in kind it has provided to employees and staff. The current rate of 13.8% will increase to 15.05% from April 2022, although this charge is an allowable deduction for corporation tax purposes.
There is no equivalent of the EA for the self-employed. Profits chargeable to the Class 4 NIC charges will be subject to a 1.25% increase in the main rate (from 9% to 10.25%) and the higher rate (from 2% to 3.25%) from April 2022.
Surprisingly, from April 2023 this 1.25% increase is withdrawn from NIC rates, and instead morphs into the new Health and Social Care Levy. Does this mean that the Treasury now have two soft candidates for future tax increases on income?
Employed persons who have passed their State Pension age do not presently pay Class 1 NIC on their earnings. This will continue to be the case but, when the 1.25% increase becomes the Health and Social Care Levy from April 2023, this Levy will be deducted from their earning, presumably based on similar criteria to Class 1 NIC.
What about dividends?
Director/shareholders in private companies tend to take the bulk of their earnings as dividends in order to trim NIC costs (dividends are not subject to NIC). However, dividends are subject to a hybrid form of Income Tax and these hybrid rates will also increase by 1.25% from April 2022.
Is tax going to become less complicated as a result of these changes, clearly not. At a single stroke the government has created extra work for HMRC (to develop systems to calculate and collect the new Levy); created similar activity for payroll software developers and managed to introduced a new tax – something that we have not seen for some time – and that will be earmarked for the NHS and Social Care budgets, a so-called hypothecated tax.