17th March 2022

Breaking his pledge made in 2019, Boris Johnson unveiled his plans to increase National Insurance and Dividend Taxes on 7 September 2021. Johnson and Chancellor Rishi Sunak defended the plans by calling it the “biggest catch-up programme” in history and “sharing of the cost is the responsible thing to do”.

With the latest updates from the Spring Statement (23 Marc 2022), let’s run through how the tax increase will affect you if you are a contractor, a small business owner, an umbrella worker or a sole trader.

Self-employed, contractors and those in employment

The big one. An effective increase of 1.25% of National Insurance Contributions across the board will see the treasury receive an extra £12bn each year.

Sole traders in the current (2021/22) tax year pay 9% Class 4 NIC On profits between £9,568 and £50,270 and another 2% on profits above this amount. From April 2022, these figures will increase to 10.25% and 3.25%. Class 2 NIC contributions of those earning less than £6,515 will not change from £3.05 a week.

Limited company contractors will not be severely affected by NIC changes unless they pay themselves a higher salary for any reason, which is not typical.

Spring Statement Update 

From July 2022, the National Insurance Primary Threshold for Class 1 NICs and the Lower Profits Limit for Class 4 NICs will be increased and aligned with the income tax personal allowance which is set at £12,570 per annum. In other words, those in employment will only have to pay National Insurance for earnings above this new limit, instead of the previous £9,658. According to the Government, 70% of people who pay National Insurance will pay on average £330 less than last year.

From April 2022, self-employed individuals with profits between the Small Profits Threshold (SPT – £6,515) and the Lower Profit Limit (LPL – £9,568) will not pay Class 2 NICs, while being able to continue to build National Insurance credits.

Dividend Tax

Where limited company contractors are affected is here, and expected to contribute £600m annually to the cost of the social care reform. The tax on dividends will increase on anything received above the £2,000 allowance.

Limited company contractors in the basic rate band will pay 8.75%, up from the current rate of 7.5%. Those in the higher rate band will pay 33.75% instead of 32.5%, while additional taxpayers will see their taxes increase to 39.35% from 38.1%.

Employer’s National Insurance

Because hiring organisations also pay NIC, they are not exempt from the tax rise either, making hiring more expensive. Employer’s NIC will go from 13.8% to 15.05%, which will, of course, hit all of those end clients who moved their contractors onto payroll as a consequence of the IR35 reform.

Spring Statement Update 

Per the Chancellors’ announcement on the 23rd March, the Employment Allowance will be increased by £1,000 from 6 April 2022 to £5,000 allowing eligible companies to reduce their annual National Insurance liability.

Umbrella Workers

Another victim and perhaps one of the most affected by the Governments’ tax increase effort is the umbrella worker, who will see their NIC increase like everyone else employed under the PAYE scheme in the UK.

Because umbrella workers are engaged as temporary workers by their end-client, they also see the employer’s NIC deducted from their payslip, which will also suffer the 1.25% increase.

Spring Statement Update 

The new National Insurance threshold announced in the Spring Statement will however ease the burden somewhat for those earning less than £35K a year.

Summary

Once again, in an effort to collect more taxes, the Government hits the sector that was so severely affected by not only the pandemic but the IR35 reform as well. Ironically, this skilled workforce the Government will need the most to bring a much needed economic recovery in the future.

For more useful tips and information, follow us on LinkedIn, Twitter or over on Facebook where we share all our articles and news.

If you have any questions or would you like to know more, feel free to contact us at 0800 917 9100 or e-mail info@myaccountant.co.uk