Increase on dividends and National Insurance rate in the UK

The government plans to increase dividend tax by 1.25 percentage points. Which means investors will have to pay more on the money they get from owning company shares.  The announcement, made on 7 September, came alongside proposals for a 1.25 percentage points change in National Insurance rates. The state pension increase for retirees for the 2022-23 tax year.
This change will apply UK-wide. It will score at the Budget and legislate for in the next Finance Bill.

Dividend tax is charge on taxable dividend income an individual receives that falls outside of the personal allowance (£12,570 in 2021-22) and the dividend allowance (£2,000 in 2021-22). Taxable dividend income excludes, for example, dividends on assets held in ISAs.

Affected basic rate taxpayers are expect to pay, on average. An additional £150 on their dividend income in 2022-23. Affected higher rate taxpayers are expect to pay, on average, an additional £403 on their dividend income in 2022-23. Additional and higher rate taxpayers are expect to contribute over 70 per cent of the revenue from this increase in 2022-23.

How much dividend tax do I pay?

Dividend tax depends on how much income and capital gains receive in a year.

If you receive less than £12,570 then this falls within the personal allowance you don’t pay any tax on. If investments are your only source of income then this increases to £14,570. The table below shows how much dividend tax is currently. What it will next year under the plans base on your income tax band.

How much extra National Insurance will I have to pay?

The Health and Social Care Levy will apply to employees and employers liable for Class 1 NICs and to self-employed individuals liable for Class 4 NICs. It will be introduced from April 2022.

For an average basic rate employee earning £20,000 per annum, they will contribute an additional £130 a year. Meanwhile a typical higher rate employee earning £80,000 per annum will pay a further £880 a year.

It’s important to note the NIC increase will also apply to employers too, who will pay an additional 1.25% in employer NICs from April 2022.

Employers will have to pay the levy for employees earning above the Secondary Threshold of National Insurance, which is £8,840 in 2021-22. Existing reliefs will continue to apply for employers of apprentices under the age of 25, all employees under the age of 21, veterans, and new employees in Freeports from April 2022.

The Employment Allowance allows eligible employers to reduce their NICs liability by up to £4,000 per year and this means the Government believe that 40% of small business owners will paying nothing extra in employer NICs.

The Health and Social Care Levy will become a separate tax on earned income from April 2023 and NICs rates will then be reduced by the temporary increase.

National Insurance Rate

We have shown below how it is expected the rates will increase for employees and employers:

We have also included a table to show the impact on the Self-Employed:

Working pensioners over the age of 65 are currently exempt from NICs. However, from April 2023, working pensioners will also be required to pay their 1.25% contributions to the health and social care levy.

However, 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 £12bn revenue expected to be raised each year, £11.4bn will come from the levy.

HM Treasury’s analysis of the impacts of the measures concludes that households with the highest 20% of incomes will contribute more than 40 times that of those with the lowest 20% of income, with more than one-third of the overall tax increases coming from the top 10% of households.