The new tax year is approaching quickly and whilst most businesses tax years are not aligned to the 6th April start date the effect of changes kicks in at this date. So what changes are coming in the new tax year and what will be the impact for business? Given the fact that allowances for income have been frozen, it will come as no surprise to learn that in general business owners, the self-employed and indeed employees are being hit in terms of what ends up in their back pockets. Note – the personal allowance will not change from £12,570 until 2025 / 26, along with the introduction of other forms of stealth tax i.e. no increase to IHT threshold. So you will pay more tax, but it isn’t labelled as a tax increase.
Dividend Tax
There will be a 1.25% increase to dividend tax rates (on all bands) from 6th April. This means that any dividend income in excess of the personal dividend allowance (£2,000) will be taxed at the following rates –
| Income tax band | Dividend tax rate 2021-22 | Dividend tax rate 2022-23 |
| Basic rate | 7.5% | 8.75% |
| Higher rate | 32.5% | 33.75% |
| Additional rate | 38.1% | 39.35% |
In real terms this flat 1.25% increase equates to an increase (in real terms) of 16.67% for basic rate taxpayers (1.25% / 7.5% = 16.67% increase), a 3.84% increase for Higher Rate Taxpayers and a 3.18% increase for Additional Rate Taxpayers.
The dividend tax allowance in 2016 / 17 & 2017 / 18 was £5,000 and since 2018 / 19 it has been reduced to £2,000. Before 2016 any dividend received was deemed to have had a notional 10% tax credit (which meant that there was no further liability for a basic rate taxpayer and an effectively reduced rate for higher and additional rate taxpayers).
For business owners the question of Dividend income Vs Salary raises its head again. This is certainly one for discussing with your accountant. One point to note is that a dividend could be refused by a company owner and a pension contribution made instead, the benefit being of course that this would attract Corporation Tax Relief (which is due to potentially increase from April 2023!
The dividend tax increase not only affects business owners but also anyone with dividend bearing investments.
It is more important than ever for investors to try and utilise their ISA allowances moving forward. Any gains (dividends included) made in an ISA are not subject to further taxation. Even if you decided not to invest the funds in dividend bearing assets now, you could still transfer your cash ISA into a Stocks and Shares ISA in the future.
National Insurance
National Insurance rates are increasing for everyone by 1.25%. Again, this flat rate clouds the increase in real terms. For an employer this means that the rate increases from 13.8% to 15.05% of employee earnings in excess of the Secondary Threshold (£9,100 in 2022 / 23). This equates to an increase in real terms of 9.06% for employers. Please note that the Secondary Threshold has increased from £8,840 to £9,100 meaning that employees will earn more before employers pay National Insurance contributions (but the rate has increased as noted above).
The only good news is that should a business owner elect to permit salary sacrifice for employees (including themselves) then there is essentially an increase of £150.50 for every £1,000 of salary sacrificed into a pension.
For employees the changes to National Insurance look like this –
| 2021-22 | 2022-23 | ||
| Earnings threshold | Class 1 rate | Earnings threshold | Class 1 rate |
| Less than £9,568 | 0% | Less than £9,880 | 0% |
| £9,568-£50,270 | 12% | £9,880-£50,270 | 13.25% |
| More than £50,270 | 2% | More than £50,270 | 3.25% |
Again the real rates of the increase for employees earning between £9,880 and £50,270 is 10.41% (1.25% / 12.0% = 10.41%) and from £50,270 the real rate of increase is 62.5%.
For those self employed or in a partnership then National Insurance will look like this –
| 2021-22 | 2022-23 | ||
| Profits threshold | Class 2 & 4 rates | Profits threshold | Class 2 & 4 rates |
| Less than £6,515 | 0% | Less than £6,725 | 0% |
| £6,515-£9,568 | £3.05 per week (Class 2) | £6,725-£9,880 | £3.15 per week (Class 2) |
| £9,568-£50,270 | 9% + £3.05 per week | £9,880-£50,270 | 10.25% + £3.15 per week |
| More than £50,270 | 2% + £3.05 per week | More than £50,270 | 3.25% + £3.15 per week |
For the self employed the real rates of tax increase between £9,880 to £50,270 is 13.89% (1.25% / 9.0% = 13.89%) and from £50,270 the real rate of increase is 62.5%!
Voluntary Class 3 National Insurance contributions will increase from £15.40 to £15.85 per week.
Summary
With changes in tax and National Insurance rates (as well as the frozen allowances and thresholds which increases your tax further) and a planned increase to Corporation Tax from (April 2023), there has potentially never been a more important time to review the financial planning for you and your business.
Should you have any questions then please contact Dale or myself and we will be happy to work with you and your other professional advisers to ensure that you are on track to prepare for the future.
^^This communication is for general information only and is not intended to be individual advice. References to Tax Relief & Allowances, and National Insurance rate figures correct at time of issue.