Boris Johnson last week revealed that National Insurance rates (NICs) will increase by 1.25 percentage points from April 2022.
Under the plans, employees, employers and the self-employed will see increases to their Class 1 and Class 4 NICs from April 2022. This will happen for one year.
From April 2023, NICs revert to current rates and that 1.25% extra is being collected as a new Health and Social Care Levy.
When the levy is introduced, it will be paid on all earned income. This means those working beyond state pension age will also need to pay the levy.
Dividend tax rates on shares will also increase by 1.25 percentage points.
Class 1 NICs are paid by employers and employees based on the salaries of the employees. Self-employed ‘sole traders’ pay Class 4 NICs based on their profits.
How new National Insurance rates work
The changes vary depending on how much you earn. The rules are different for employed workers and those who are sole traders.
Employers will be paying a new Class 1 basic rate of 15.05% from April 2022. It then reverts to 13.8% with an additional 1.25% (or 1.25p in the £1) being collected as the Health and Social Care Levy.
If you’re employed, you currently pay Class 1 contributions of 12% if your salary is between £9,568 and £50,000 per year. Your contributions will rise to 13.25%. Earnings over £50,000 currently attract an additional 2% levy and this rises to 3.25% from April 2022. After the changes, the rates will rise to 13.25% and 3.25%.
This is what new NICs you will pay depending on your salary:
- £20,000 – will pay an extra £130 a year (£10.80 per month)
- £30,000 – will pay an extra £255 a year (£21.25 per month)
- £50,000 – will pay an extra £505 a year (£45.80 per month)
- £80,000 – will pay an extra £880 a year (£73.33 per month)
- £100,000 – will pay an extra £1,130 a year (£94.16 per month)
Self-employed people who pay Class 4 NICs currently pay a rate of 9% of profits between £9,568 to £50,270. Beyond that ceiling, there is an additional 2% levy. From April 2022 this increases to 10.35% and the additional levy for profits above £50,270 increases to 3.25%.
Class 2 NICs for the self-employed are not affected by the new rates.
Directors and dividends
Shareholders and directors paid from dividends will also see an increase in dividend rates. From April 2022, the basic rate increases from 7.5% to 8.75%. The higher rates increases from 32.5% to 33.75%.
Landlords will not be affected by the increase, unless they operate via a limited company. If you are limited, then your dividend tax rates will be increasing from April 2022.
Health and Social Care Levy explained
At the moment, employers, employees and the self-employed pay NICs and these funds are used for benefits and pensions. This includes basic state pension and contribution-based jobseeker’s allowances. Income taxes are used for other government spending, such as health.
NICs are increasing by 1.25 percentage points from April 2022 to provide extra funding for health and social care. These contributions will be ring fenced by government for that care.
From April 2023, a whole new levy is being introduced called the Health and Social Care Levy. That is when the 1.25% additional contributions will be collected under the banner of a levy.
It still means you’ll be paying more in contributions. Presumably, the decision to collect the extra contributions under NICs next year is because it will take time to set up the Health and Social Care Levy.
If you want to know more about NICs and the new rates, contact us today for more details.