The care system in England was under pressure even before the pandemic. An ageing population, recruitment challenges and falling government funding were all contributory factors.
The impact of Covid 19 on the NHS and social care has been huge, and in September, the Prime Minister announced plans to relieve some of the burden by raising an additional £12 bn per year through the tax system.
Changes will begin to take effect in April 2022. With just a few months to go now until the end of the current tax year, business owners need to consider what impact the changes will have on their business and personal finances – and decide whether they should take any action.
- National Insurance
All classes of National Insurance contributions (Class 1 paid by employees, Class1a and 1b paid by employers and Class 4 paid by the self-employed) will increase by 1.25% from April 2022. They will return to current rates in April 2023 to be replaced by a new tax known as the Health and Social Care Levy.
- Dividend Tax
From April 2022, dividend tax rates will increase by 1.25%. Basic rate taxpayers will have to pay tax at 8.75% rather than the current 7.5%. Higher rate taxpayers will see the rate of tax they pay rise from 32.5% to 33.75%.
The £2k dividend allowance to which everyone is entitled will remain unchanged.
How will the changes impact your business?
The new legislation being introduced will raise money to help protect the future of the health and social care services we all benefit from, but inevitably, there will be an impact on businesses – at a time when many are still recovering from the economic effects of the pandemic.
As well as the additional admin implementing the changes will entail, there are implications for business owners who employ staff or use dividends to remunerate themselves.
Do you do either of these things? If you do, you need to review your financial position before the end of this tax year and work out if it will be advantageous for you to take a one-time benefit in the form of increased earnings for the tax year 2021/22. Doing so will mean you’ll get a higher tax bill in the current tax year of course, but depending on your personal circumstances, it might still be a sensible decision given that you’ll pay more tax on your earnings after April.
- If you employ staff…
If your business employs staff and you’re planning to pay bonuses after April 2022, you may want to consider bringing payments forward. Doing this will reduce the amount your company pays towards employees National Insurance. In addition, it will benefit your staff. The National Insurance they’ll be required to pay will be at the current, lower rate.
Looking further ahead, businesses employing staff will need to consider the longer-term impact of the National Insurance increase / Health and Social Care Levy. Companies will have to review how the rise in employment costs will affect their cash flow and profitability, and decide whether to absorb the increase or pass it on to customers.
Some business owners might also want to explore more creative ways of managing employment costs – for example, by introducing salary sacrifice benefit schemes for staff.
- If you pay yourself dividends…
If you operate your business as a limited company, you may well remunerate yourself wholly or in part through dividend payments to optimise your tax efficiency. If this is the case, it might make financial sense to take a higher than usual dividend before the changes come into effect in April.
You can distribute dividends at any point in the year – so long as you have sufficient profit in your business after allowing for Corporation Tax.
Any dividend you pay yourself before April will need to be reported on your 2021-22 self-assessment tax return, and you’ll need to be careful the additional income doesn’t’ tip you into a higher Income Tax band
There are just a few months to go until these changes come into effect. Although there’s no way to avoid paying more in National Insurance and tax on dividends after April 2022, there is still time to adjust earnings in this tax year and pay tax at current rates.
Whether it makes financial sense for you to take a dividend or pay bonuses before April will depend on a range of factors that are unique to you.
If you’d like help understanding your position and how these changes affect you, Inca can review your financial situation and advise you of your options.