What the NIC and Dividend Tax Hike Means for Your Business
Much has been made of the government’s decision to increase national insurance and dividend tax. However, while most reports focus on the impact on workers, these changes will have significant costs for employers. Here’s how you could be affected and what you can do.
First, let’s look at the detail of the rises.
- NIC: A 1.25% rise in primary and secondary class 1 NIC for employees and employers, and class 4 NIC, for the self employed for a year only. There will also be a 1.25% rise in Class 1A and Class 1B NIC rates which apply to certain benefits in kind and PAYE settlement agreements. The rate will move from the current level of 13.8% to 15.05% and will apply for one year only.
- The levy: 1.25% on earnings, but will apply to all those who work, unlike the NIC increase, even if they have hit pension age. This will apply from April 6th 2023.
- Dividend tax: The tax on dividends also rises by 1.25% bringing rates to 8.75% for basic rate taxpayers, 33.75% for higher rate and 39.35% for an additional rate payer. The tax rate for an overdrawn loan account will rise from 32.5% to 22.75% from April 2022.
These changes sparked quite a reaction. The Federation of small businesses called them ‘extraordinary’. National Chairman Mike Cherry blasted the changes saying: “After the huge amount of damage wrought to businesses over the last 16 months, the government cannot be serious about a strong economic recovery if it thinks hiking the jobs tax is a good idea.”
Small businesses have already suffered during the pandemic. A report from Simply Business suggests the pandemic has already cost small firms £126.6bn. This new tax rise will make life just a little bit tougher. Indeed, the closer you look at it, the bigger the burden looks.
Headlines point to a 1.25% increase, but in reality, this will translate to 1.25% plus 9%. Both employers and employees could see NIC rise by almost 10%.
The self-employed will also suffer. Class 4 national insurance contributions apply if your annual profit is more than £9,568 for the 2021/22 tax year. The NIC increase means your take home pay will drop by 1.25p for every pound you earn.
Meanwhile, the tax on dividends will impact business owners or self-employed people who run a limited company and regularly use dividend payments to top up their income. Many may decide to bring forward dividend payments, where possible, into the current tax year to avoid the costs.
How to adjust to this change
Ultimately, this is a direct tax on work and will hit both employers and employees in the pocket. Taking the changes into account, employing a person on the living wage could cost an extra £200 per year. If you have a reasonable number of employees, that adds up to a considerable sum.
Employers will have to respond. Some will be looking to make savings elsewhere to cut back on recruitment to absorb the cost.
Others might actively look to reduce their wage bills with redundancies. With furlough coming to an end, many businesses are already in a perilous state. A report from the LSE warned that a million jobs are at risk with one in 16 businesses saying they are at risk of closing.
The problem with most of these responses is that they may do more harm than good. Postponing recruitment or investment into your business will harm growth. If your employees are being effectively paid less, while seeing their workloads increase, they are unlikely to react well. Austerity has already shown how tighter financial conditions lead to increases in mental health problems. This is likely to make the problem even more serious. Stressed workers are also likely to be less productive and have higher rates of absenteeism. Companies could see an increase in turnover which harms productivity and can increase costs.
However, by taking a careful look at finances and engaging with employees, it is possible to find solutions which work for everyone. Below we look at a couple of suggestions.
Businesses may look at salary sacrifice schemes where employees reduce their wages in return for an increase in contributions to their pension scheme. This comes free of income tax and NIC.
Depending on their personal circumstances, many employees may be happy to reduce their income in the short term, in the knowledge that they will enjoy a bigger pension income on retirement.
Checking for updates
If the last 18 months have taught us anything, it’s that government policy is always changing. Support packages have been announced at the last moment and deadlines have been extended. While the government believes this tax increase will help them fund the NHS, they can’t be sure of the short-term impacts on economic recovery. It is possible we will see further support packages announced to help struggling businesses over the next few months. With COVID-19 still making its presence felt, it’s worth keeping an eye out for new support measures or changes to the law.
Businesses can also help themselves by getting a better grip on their finances. Cash flow problems cause over 80% of business failures. Much of that comes down to businesses which have failed to gain proper oversight of their finances.
By speaking to an accounting consultant, you can get a run down of your costs and how you will be affected by the change. They can advise you on the true financial impact of the new tax regime and how to adjust accordingly.
Accounting software can also give you better oversight of your real time financial position. Many small firms are working with accounting systems which are unable to cope with their growing demands. Financial information is often incomplete or out of date making them vulnerable to critical cashflow problems.
At 3WiseBears we can help businesses with affordable advice and provide access to some of the leading online accounting packages on the market such as Xero. By working together, we can help you get a clearer idea of the true costs of the proposed changes.