Business Owner – increase in NI and Dividends tax consequences and considerations

The Prime Minister announced the increase in National Insurance Contributions and Dividends tax from April 2022.

We wrote before about tax efficient ways of withdrawing money out of your company , but does this advice still apply?

 

If you are a Sole Director

The answer is “Yes”. If your income is least than £9,568 (NI threshold for tax year 2021-22) then you won’t pay National Insurance Contributions. This means you can have a monthly salary of £797.34 where you pay no Income tax or NI.

Ok, but what if I need to pay myself more?

Provided you have enough available reserves ( after you accounted for your Corporation Tax liability and disallowed costs), you still have the option to pay yourself the rest of required income via dividends.

How are Dividends taxed?

Dividends are tax free up to £2,000. Anything over this amount and up to £37,699 is taxed at 8.75%( 7.5% + 1.25%), from April 2022.

You will also need to account for Corporation tax with the current rate being set at 19%, if your profit is less than £50,000 (from 2023).

Therefore, if your profit is less than £50,000 and you are a basic rate tax payer, it will still be better to pay yourself a combination of salary and dividends. If you so, the total tax you would pay would be  27.75% (8.75% on dividends + 19% corporation tax).

If you have employees

As an employer, you will need to 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£50,271  a year. Anything earned over this amount is taxed at 2%.

An increase in the rate by 1.25% means you your employee costs will increase,  your profit will be reduced and your available dividends will be reduced as well.

Ok, so not so good news in this case. What can I do to prepare for the change?

The best way to prepare for a change is to ensure you understand your current financial position and the impact of these changes. As your accountant, we can provide you a rundown the costs your business would incur from the change, to make sure you can afford the new payrolls.

As an accounting practice which uses the most advanced accounting software, we can also provide your own analysis of the figures in real-time.

Anything else I should consider?

Pension contributions. Is a good time to reconsider them,  as they effectively cut your salary, and pay money into your pension, which is free of both income tax and national insurance.

If you offer your employees a salary sacrifice scheme for pension contributions, then they will likely choose to slash their National Insurance bill by accepting a reduction in salary and asking you to pay the difference directly into their pension.

 

Lastly, we can always talk about which scenario suits you best. This is what we are here for and as usual, you can contact us for more details at hello@visionaccountants.co.uk.