Tax tips: How to shield yourself against the latest NI and dividend tax hikes
What are the changes?
In a bold move that tears up the Conservative’s manifesto pledge on raising taxes, the UK Government has confirmed that rates of National Insurance (NI) will be increased to address the impact of the coronavirus pandemic on the NHS and to address the long-standing funding gap for health and social care.
National Insurance Contributions (NIC) and dividend tax rates will increase by 1.25% throughout the UK from April 2022, with the calculated £12 billion annual tax on income increase to be earmarked to pay for health and social care.
From 1 April 2022, there will be a temporary 1.25% increase in class 1 (employee) and class 4 (self-employed) NIC paid by workers, as well as a 1.25% increase in class 1 secondary NIC paid by employers (so 2.5% in total).
The increase will apply to employed (include deemed employees) and self-employed individuals and partners earning above the class 1 primary threshold / class 4 lower profits limit (currently £9,568 in 2021/22).
From April 2023, the new increases will be legislated separately as a “health and social care levy” and NI rates will return to 2021/22 levels, and extend to individuals over state pension age in employment or self-employment, who are currently exempt from paying NI.
How much extra NI will I pay?
An example of how NI contributions will change with a 1.25% increase:
- £50,000 salary: £4,852 paid now; £5,357 with 1.25% increase - £505 extra each year
- £100,000 salary: £5,879 paid now; £7,010 with 1.25% increase - £1,131 extra each year
- £250,000 salary: £8,879 paid now; £11,884 with 1.25% increase - £3,005 extra each year
How to cut your NI bill
If your employer offers a salary sacrifice scheme for pension contributions, then you can slash your NI bill by paying more into your pension.
The idea is that by giving up a portion of your salary, the amount you get paid is reduced – which decreases the amount of income tax and NI you pay.
This means that part of your reward package will be sheltered completely from the tax. If you're exchanging your salary for pension contributions, you will in turn also give your retirement savings a boost, so you have more money in later life.
What about dividends?
Alongside the levy, which will be paid by employees, the self-employed and businesses, the government has announced a 1.25% increase in dividend tax rates from 6 April 2022, taking rates to 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers and 39.35% for additional rate taxpayers.
This will affect directors of limited companies and their investors who receive dividends as income from their investments or business above their £2,000 dividend allowance.
Working out tax on dividends
How much tax you pay on dividends above the dividend allowance depends on your Income Tax band.
From April 2022, tax on dividend income will increase by 1.25% to help support the NHS and social care.
|Tax band||Tax rate on dividends over the allowance||New tax rate from April 2022|
Can I reduce tax paid on dividends?
From 6 April 2022, the tax paid on dividends above the £2,000 allowance will increase by 1.25%
The move will impact investors as well as employees and directors of small businesses who remunerate themselves partly or wholly through dividends rather than a salary. It could also hurt investors with dividend generating shares and funds held outside of ISAs and pensions.
The good news is you can still take steps to shelter your dividends from tax. These are worth taking, even if you don’t currently earn £2,000 in dividends, because in future your investments may grow, the yield could rise, or the dividend allowance could face the chop again.
The £5,000 limit was only around four years ago, so there’s no saying how long the £2,000 limit on tax free dividends will remain in place.
Five ways to avoid dividend tax
1) Take advantage of this year’s ISA allowance
Investments within ISAs are not subject to dividend taxes, so in the current 2021/22 tax year, you can move up to £20,000 of cash or existing investments into ISA wrappers.
2) Take advantage of your ISA allowance on the first day of the new tax year
From 6 April 2022, you will have a new ISA allowance to take advantage of. At the very start of the new tax year – before you have earned any dividends – you can transfer another £20,000 into ISAs using the Bed & ISA process. In the new tax year, you will have a capital gains tax allowance of £12,300 available to utilise.
3) Use your spouse’s allowance
If you’re married and your spouse isn’t using their ISA allowances, you can give assets to them without generating any kind of tax charge. If they aren’t using their own dividend allowance, you could also utilise that.
4) Use your pension allowance
You can use a Bed & SIPP arrangement, which works similarly to Bed & ISA, but you are sheltering investments in a pension instead of an ISA. It has the additional advantage of offering an immediate 20% income tax relief boost. Higher rate taxpayers receive additional tax relief on Bed & SIPP as they do with normal pension contributions.
5) Consider growth investments
If you can’t use ISAs or pensions to shelter all your portfolio from tax, you can consider how you hold the growth and income-generating parts of your portfolio.
You can focus on dividend-producing investments within the portion of your portfolio held in an ISA, and prioritise generating growth on investments outside the ISA.
Individuals with assets of less than £20,000 will not make any contribution to care costs from savings or the value of their home (an increase from £14,000), and those with assets between £20,000 and £100,000 will be eligible for means-tested support.
The social care plan applies to England only, but Scotland, Wales and Northern Ireland will receive an additional £2.2 billion in additional health and social care spending from the levy.
The tax-raising measures and their impacts are outlined in the government’s plan for health and social care, which was published alongside the Prime Minister’s speech. It estimates that of the £12 billion revenue expected to be raised each year, £11.4bn will come from the levy.
The new tax changes will see most working people pay more tax but, through careful planning and working with an adviser to organise your financial affairs, there may be ways to avoid the increases and improve your position.
Speak to a Professional Financial Planner
If you are unsure if your investments and pensions are structured in a tax efficient manner or would like to discuss tax efficient investment structures, please contact us for a free consultation meeting. It is important to remember that tax treatment will depend on your circumstances and may change in the future.
The information and/or any reference to specific instruments contained in this document does not constitute an investment recommendation or tax advice. Capital at risk. The value of your investments and the income from them may go down as well as up, and you could get back less than you invested. Tax rules are subject to change and taxation will vary depending on individual circumstances.