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Business owner? Why the new social care proposals will cost you

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Last month, the government finally announced their plans to tackle the UK’s social care crisis. Alongside a cap on care costs, the prime minister unveiled a rise in both National Insurance contributions (NICs) and Dividend Tax from 2022.

He also revealed the National Insurance increase would be rebranded as a new “Health and Social Care Levy” from 2023.

If you’re a business owner, a director, or a sole trader, then the tax hike will directly affect you.

Indeed, the Federation of Small Businesses has warned that more than 50,000 jobs in UK small businesses are at risk from the National Insurance hike, which will cost British SMEs about £5.7 billion.

Read on to discover how the changes will affect you and your business.

NICs set to rise by 1.25p in the pound from 2022

Speaking in parliament on 7 September, Boris Johnson revealed plans to increase NICs and Dividend Tax from April 2022.

The increase of 1.25 percentage points is designed to provide a short-term boost to the NHS as it recovers from Covid-19 and, in the longer term, increase funding for social care. The tax rise will affect employees, employers, and the self-employed across the UK.

From April 2022, both employee and employer NICs will increase by 1.25 percentage points. Then, from April 2023, the extra 1.25% will be collected as a separate Health and Social Care levy.

Source: Money Saving Expert

Interestingly, for the first time, this additional levy will also be paid by workers above State Pension Age.

If you’re a small business

As shown in the table above, employers and employees currently pay Class 1 National Insurance, which is based on how much an employee earns. The rate is 13.8% for employers, while employees pay 12% of their earnings, up to £50,000 a year. Anything earned over this amount is taxed at 2%.

From 2022, your business will pay increased NICs for your staff. It’s estimated that the new rates will cost employers around £5.7 billion.

Suren Thiru, head of economics at the British Chambers of Commerce, said that it was opposed to the increase. He said: “Firms have been hammered by 18 months of Covid-related restrictions and have built up huge debt burdens.

“This rise will impact the wider economic recovery by landing significant costs on firms when they are already facing a raft of new cost pressures, and dampen the entrepreneurial spirit needed to drive the recovery.”

As far as employees are concerned, the rates on Class 1 contributions (which employees pay on earnings in excess of £9,568 a year) will rise from 12% to 13.25%. The “upper earnings rate” – which kicks in on earnings of more than £50,270 a year – will increase from 2% to 3.25%.

The BBC report that a typical basic-rate taxpayer earning £24,100 would pay an additional £180 a year, while a higher rate taxpayer on £67,100 would pay an extra £715 because of the new tax.

If you’re a sole trader

If you’re a sole trader, you may feel the pain of the tax rises more than most. Paying taxes through self-assessment means that your rate is based on income after business expenses so, in reality, it directly affects how much salary you can pay yourself.

You’ll pay Class 4 National Insurance contributions if your annual profit is more than £9,568 (2021/22 tax year). You’ll also pay a higher rate on any earnings above £50,270.

Here’s an outline of the current rate and how the rates will apply from 2022:

Source: Money Saving Expert

Some lower-earning freelancers pay Class 2 NICs at a rate of £3.05 a week on annual earnings from £6,515 up to the class four £9,568 threshold. The National Insurance rise will not apply to Class 2 contributions.

Dividend Tax also rising

If you’re a director of your business, and you elect to take some or all of your salary through dividends, then you’re also facing a tax increase from 2022.

Alongside the NIC hike, Dividend Tax will also rise by 1.25 percentage points from April 2022.

If you take home more than £2,000 a year in dividends, you will face a slightly higher tax bill regardless of your Income Tax band.

For example, if you’re a basic-rate taxpayer and you receive £3,000 in dividends then you will pay Dividend Tax on £1,000. The tax rise means that your bill will rise from £75 to £87.50.

Alternatively, if you’re a higher-rate taxpayer taking £10,000 in dividend payments then you would pay 33.75% on £8,000 of dividends. This would result in a Dividend Tax bill of £2,700, up £100 from the current system.

Kitty Ussher, chief economist at the Institute of Directors, said the proposals demonstrated a lack of understanding of the difficulties that many small business owners face.

She added: “The surprise new tax on dividends will yet again target small company directors”.

Referring to the lack of financial backing for many directors over the last 18 months, she added: “Incorporated sole traders and other owner-managers, who relied on dividend income, were the only group of workers that were not supported by government during the pandemic”.

Get in touch

If you have any questions about the tax rises, or you’re a business owner looking for expert financial planning advice, please get in touch. Email hello@sovereign-ifa.co.uk or call us on 01454 416 653.

Please note

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

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