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National Insurance and dividend tax rises – what you need to know

Boris Johnson has announced a rise in National Insurance and dividend tax. We look at what this could mean.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Boris Johnson has announced a rise in National Insurance contributions and dividend tax to raise £36bn over the next three years for health and social care reform.  

The new rules are expected to come into effect from April 2022.   

We look at what this could mean.

This article isn’t personal advice. If you’re not sure what’s right for your circumstances, please ask for financial advice.

The change to National Insurance contributions  

National Insurance contributions will temporarily rise by 1.25 percentage points from April 2022. This increase will then be replaced by a separate health and social care levy from April 2023.

All working adults, even those above state pension age, will pay the new health and social care levy as part of their National Insurance contributions from April 2023. Only those below the state pension age will pay this in the 22/23 tax year.

The government has said a typical basic-rate taxpayer earning £24,100 will contribute £180 in the 2022/23 tax year. Whereas a typical higher-rate taxpayer earning £67,100 will contribute £715. Additional-rate taxpayers make up just 2% of individuals affected, but will contribute nearly a fifth of the revenue raised.

What does the dividend tax rise mean for investors?

Everyone has a £2,000 dividend allowance. Only if your total income is more than your personal allowance, and you also exceed the dividend allowance, will you start paying tax on your dividends.

Basic-rate taxpayers currently pay 7.5% on any dividends they get over the dividend allowance. From April 2022, this will rise to 8.75%.

For higher-rate and additional -rate taxpayers, this will rise to 33.75% and 39.35% respectively. 

Scottish taxpayers pay tax on savings and dividends based on the rest of UK tax bands.

The reality is that this will impact higher value portfolios. And for many there’s a relief Boris didn’t look to take this further or remove the dividend allowance altogether.

It’s also a stark reminder that today’s tax rules can and will change. So it’s best to shelter your investments from tax wherever possible. The most popular options are using a Stocks and Shares ISA or, a Self-Invested Personal Pension (SIPP).

Remember, money in a pension can’t normally be accessed until age 55 (57 from 2028).

By paying less tax, you have more left to keep and potentially grow for the future. Though the benefits of an ISA or SIPP will depend on your personal circumstances. Remember also that all investments and any income from them will fall as well as rise in value, so you could get back less than you invest.

Find out more about Stocks and Shares ISAs

Find out more about self-invested personal pensions (SIPPs)

Limited company owners – the biggest losers of the dividend tax rise?

Those who own their own limited company are likely to feel the biggest hit from the changes to dividend tax.

Some, rather than, or in addition to, paying themselves a salary, will pay themselves in the form of dividends from any company profits. This helps save them a lot on tax. The current, and new, rates of dividend tax are at least 5% lower than the comparable rest of UK income tax band.

Business owners could also see the 1.25% National Insurance contribution (later the health and social care levy) charged on money they take as a salary. And might face a charge as both the employee and the employer. A double whammy.

Visit our hub for the self-employed and business owners

Looking at the bigger picture

While the temporary increase in National Insurance contributions, the new health and social care levy and dividend tax rises will get the headlines, there’s more to the story.

The social care reform changes could have a much bigger impact on your finances. Especially if you or your family need long-term care.

Currently, anyone with assets over £23,250 in England must pay their care costs in full.  

But from October 2023, the government will introduce a new £86,000 cap on the amount anyone in England will need to spend on their personal care over their lifetime. Those with assets of less than £20,000 won’t have to pay anything. Those with assets worth between £20,000 and £100,000 will be eligible for some means-tested support.  

This could mean many no longer need to raid their savings or sell the family home to meet costs.

The cap only relates to personal care costs, and not accommodation though. So the costs of someone needing care could remain substantial and will still need to be met. This is an area where financial advice on long-term care could help.

Find out more about financial advice 

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Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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