September 07, 2021
The U.K. Government today announced a 1.25 percent increase effective from April 2022 to U.K. social security contributions from businesses and individuals, and the same for U.K. income tax payable by individuals on dividend receipts. This resiles from a Government commitment included in its 2019 election manifesto not to increase the rates of broad-based taxes such as income tax and social security. The Government expects an additional £12 billion per year to be raised which will be used to fund the National Health Service and adult social care system.
These tax rises reinforce a pattern of tax increases in the wake of the COVID-19 pandemic. A six percent increase in the main rate of U.K. corporation tax effective from April 2023 was announced and enacted earlier this year (although, in that instance, the tax in question was not covered by the 2019 manifesto commitment).
For employment income, the incremental charge will effectively be doubled, as the 1.25 percent increase will apply both to the rate of national insurance contributions (NICs) generally charged on employees through deduction at source, and also to the rate of NICs separately charged on employers. The increase will also apply to “Class 4” NICs charged on the profits of individuals who are self-employed, either as a sole trader or through a partnership. Current NIC thresholds and allowances which limit the charge for lower-paid employees and smaller businesses will continue to apply.
From April 2023, the 1.25 percent social security charge will be separated from NICs as a new “Health and Social Care Levy,” and the 2022 increases in NIC rates will be reversed. The scope of the new levy will follow the scheme of NICs, except that it will also apply to employed individuals of above the state pension age, whose employment income is not subject to NICs.
The increases to the income tax rates paid by individuals on dividends are presented as a fairness measure, so that business owners and investors make a contribution arguably in line with the employed and self-employed. The parallels are perhaps clearer in the case of shareholders receiving dividends from their personal service companies, as opposed to dividends paid by a listed company to its individual retail investors. The dividend rates of income tax following the April 2022 increase will be 8.75 percent for taxpayers subject to income tax at the basic rate, 33.75 percent at the higher rate and 39.35 percent at the additional rate (the annual income threshold for the additional rate being £150,000). The rates and exemptions for corporation tax on distributions received by a U.K. company will not be changed under this measure.
Companies may consider accelerating planned dividend payments to March 2022 or before.
For further information, please get in touch with any member of the London Tax team, or your usual Shearman & Sterling contacts.