Despite mounting pressure to perform a U-turn due to the rising cost of living, the Chancellor and Prime Minister have confirmed that the increase to National Insurance and dividend taxation will go ahead as planned in April.
National Insurance (NI) is a tax on earnings paid by employees, employers and the self-employed.
Last year, Boris Johnson announced that NI and dividends tax will rise in April 2022. The new measure, the Prime Minister said, is a Health and Social Care Levy and will help fund the NHS. According to Johnson, the move will raise billions of pounds for frontline services over the next three years.
Writing in the Sunday Times, Johnson and Sunak said: “We must continue to be responsible now, as we deal with Covid aftershocks — and above all with the Covid backlogs in healthcare.
“[…] We must go ahead with the health and care levy. It is progressive: the burden falls most on those who can most afford it.
“Every penny of that £39 billion will go on crucial objectives – including nine million more checks, scans and operations, and 50,000 more nurses as well as boosting social care.”
In a nutshell, the NI hike will mean that people will pay 1.25 pence more on every pound they earn.
So if a self-employed person pays £1000 in NI in 2021/22, in the 2022/23 tax year, this will rise to £1250 – an increase of more than 10% overall.
Sole traders currently pay nine percent NI on profits between £9,568 and £50,270 and two per cent on anything above that under class 4 NI. This will rise to 10.25% and 3.25%.
From April 2023, NI will return to its current rate and the additional tax will be collected as a separate Health and Social Care Levy. This will also be paid by people over the state pension age who continue to work – at the moment they are exempt from paying NI.
Freelancers and contractors working through a limited company will also face a hike to dividend tax.
Dividends are income from profits distributed to shareholders of a limited company and, as with any income, you have to pay tax on anything you earn above a certain threshold.
Basic rate taxpayers (with income between £12,570 and £50,270) pay 7.5% in dividend tax. Those within the higher rate band (£50,271 to £150,000) pay 32.5%. Income above £150,000 is taxed at 38.1%.
From April 2022, dividend taxation will rise by 1.25%, meaning if your income falls under the basic rate, you will pay 8.75%. For higher rate taxpayers this will be 33.75% and for the highest earners, the rate will increase to 39.35%.
When the tax hike was announced in the autumn budget last year, it was slammed not only by industry experts, but also by Conservative MPs. Many criticised the Prime Minister for breaking the party’s 2019 election manifesto pledge to not increase NI.
The self-employed and contractors, in particular, are set to bear the biggest brunt of the rises. And with energy prices set to soar in April, inflation at the highest rate in 30-years and a 4-year freeze on income tax thresholds also set to come into force, business leaders are concerned that low-and mid-income households will be hit the hardest.
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