Tax planning update for owner managed companies

Change to NIC from April 2022

The provisions to increase the NIC rates (classes: 1, 1A, 1B and 4) are included in the Health and Social Care Levy Bill 2021, which has already passed its House of Commons stages in Parliament, so is likely to become law very shortly.

The Health and Social Care Levy Bill makes it clear that the increase in NIC will only apply for one tax year: 2022/23, as from 6 April 2023 the Health and Social Care (HSC) Levy will replace the top 1.25% of NIC in all cases.

There are three categories of employee where the employer can currently pay a zero rate of secondary class 1 NIC on the employee’s pay up to the secondary threshold (£50,270 pa). Those categories are:

• Anyone aged under 21
• Apprentices aged under 25
• Ex-forces personnel in their first civilian role for up to 12 months

In addition, from 6 April 2022 a zero rate of secondary class 1 NIC will be available on employees’ wages who work for least 60% of their time at Freeport tax site. This zero-rate will apply up to a new secondary threshold which is expected to be set at £25,000 per year. Currently this applies to England only as the Scottish Government are considering an alternative to Freeport sites: https://www.gov.scot/policies/cities-regions/green-ports/

The HSC levy won’t be payable by the employer on employees’ wages where the zero rate of secondary class 1 NIC applies (clause 1(5)). The Health and Social Care Levy Bill makes it clear that the increase in NIC will only apply for one tax year: 2022/23, as from 6 April 2023 the Health and Social Care (HSC) Levy will replace the top 1.25% of NIC in all cases.

Employment Allowance

HMRC has stated that the employment allowance can be set against the increased secondary class 1 NIC for 2022/23, but what is not clear is whether the employment allowance will be available to set against the HSC levy from April 2023.

The Employment Allowance is not mentioned in the Health and Social Care Levy Bill 2021, but relief may be provided by regulations made under clause 4(2) after the Act is passed.

Scottish rates

The Scottish Parliament has the power to set its own rates and thresholds for income tax, so since 2017 the Scottish tax bands do not tie up with the thresholds for NIC in the rest of the UK. This is because powers to set the NIC thresholds have not been devolved to the Scottish Parliament.

The result for 2022/23 will be some very high marginal tax rates (see table) for Scottish taxpayers on earnings and profits. The Scottish income tax rates do not apply to income from savings, dividends, or to set the level of capital gains tax payable. 

Example: Employee in Scotland in 2022/23

Income in band (including personal allowance)  £	Scottish tax%	NIC%	Total rate on band %
0 – 9,568	0	0	0
9,568 – 12,570	0	13.25	13.25
12,571 – 14,667	19	13.25	22.25
14,668 – 25,296	20	13.25	33.25
25,297 – 43,662	21	13.25	34.25
43,663 – 50,270	41	13.25	54.25
50,271 – 100,000	41	3.25	44.25
100,001 – 125,140	61.5	3.25	64.75
125,140 to 150,000	41	3.25	44.25
Over 150,000	46	3.25	49.25

This table assumes that Scottish income tax rates and thresholds will remain at their present levels in 2022/23.

Marginal madness

The 54.25% marginal rate between £43,663 and £50,270, is due to the Scottish higher tax rate of 41% starting at a lower level than the reduced NIC rate, which is aligned with the 40% band in the rest of the UK. Taxpayers in England, Wales and Northern Ireland will pay a marginal tax rate of 33.25% on earned income in this band.

The 64.75% marginal rate between £100,001 and £125,140 arises because the personal allowance is withdrawn by £1 for every £2 of additional income in that band.  

Change to Dividend Tax from April 2022

• The change announced by the PM will see the rate of dividend tax rise by 1.25%.

• This means for basic rate taxpayers an increase from 7.5% to 8.75%.

• For higher rate taxpayers, the increase is from 32.5% to 33.75%, with additional rate taxpayers (those earning over £150,000) seeing a rise to 39.35%.

• All changes are in effect from April 2022.

How can Owner Managed Businesses prepare for the change?

Dividends

This makes it more important to use up the basic rate band (i.e. combination of gross salary, earned income and dividends should total £50,270) in the current 2021-22 tax year. As long as there are sufficient reserves for the Limited company to declare these dividends of course!

If there are sufficient reserves but cash flow is an issue, the declared dividends can be booked to the Director loan accounts in the current tax year.

National Insurance

Directors need to be aware of the staff who meet the criteria for the zero rate of secondary class 1 NIC so that the company’s NIC bill can be reduced.

The low salary and higher dividend strategy for owner/directors remains the tax efficient strategy.

However in order to obtain the credit towards state pension, directors should pay themselves a salary of at least £9,600 per annum (£800 per month) in 2021-22 tax year which is slightly above the Class 1 NIC threshold.

If you would like to talk more in more depth about tax planning for your own limited company  please call or drop me an email.