The new tax year brings some big changes for the payroll and HR departments of most businesses in 2022. Are you ready for the adjustments to National Minimum Wage rates and National Insurance Contributions, and the likely impacts to your business?
National Minimum Wage/National Living Wage
The National Minimum Wage (NMW) and National Living Wage (NLW) rates increase substantially from 1 April 2022:
- National Living Wage for over-23s: From £8.91 to £9.50 an hour
- National Minimum Wage for those aged 21-22: From £8.36 to £9.18
- National Minimum Wage for 18 to 20-year-olds: From £6.56 to £6.83
- National Minimum Wage for under-18s: From £4.62 to £4.81
- Apprentice Rate: From £4.30 to £4.81
For employers who provide live-in accommodation to staff on minimum wage, the ‘accommodation offset’ amount that can be deducted from daily pay increases to £8.70 per day.
The pay increase will make NMW legislation become more relevant to more employees from April and care must be taken regarding pension contributions and salary sacrifice schemes as the employee cannot sacrifice their pay below NMW levels.
The increase in NMW will also result in some employers (mainly those with part-time employees) breaching the employer NIC threshold for the first time, although they are likely to be able to claim the Employment Allowance, exempting most employers from the first £4,000 of employer NIC per tax year.
National Insurance/Dividend taxation
From April 2022, National Insurance Contributions (NIC) and dividend tax will rise by 1.25%. The increase will fund £12 billion a year for the NHS and social care. The Health and Social Care Levy will be a separate charge on payslips from April 2023.
For the year 2022/23, there will be a 1.25% increase on Class 1 NIC (both employee and employer), Class 1A NIC on most Benefits in Kind, and Class 4 NIC paid by the self-employed and partnerships. When the new levy comes into effect, NI rates will revert back to current levels.
Employed and self-employed earners over state pension age will not pay the extra NIC in 2022/23, but will be due to pay the new levy from April 2023 and employers will pay the extra 1.25% NIC charge for these earners where relevant.
Recipients of dividends in excess of the £2,000 dividend allowance will also see a 1.25% increase in their tax rate from April 2022 across all tax bands. The dividend rate for basic-rate taxpayers increases from 7.5% to 8.75% and for higher-rate taxpayers it will go up from 32.5% to 33.75%, making it even more important to carefully plan legitimate ways to ensure that dividends are spread through the family to utilise dividend allowances and basic rate bands/personal allowances.
Many business owners will be considering declaring a dividend prior to 5 April 2022 to lock in the current tax rates and crediting it to their director’s loan account, even if the funds are withdrawn later. Of course, care must be taken not to breach the various tax thresholds (£50,270 higher rate, £100k loss of personal allowance and £150k additional rate) unnecessarily, and to ensure there are sufficient current year or prior year indrawn profits (‘distributable reserves’) in order to legally declare the dividend. Please also bear in mind that by bringing forward the dividend date, you also bring forward the tax payment date. This potentially impacts payments on account, so you may need to claim to reduce these. It would be wise to seek professional help with your dividend planning.
According to the Institute for Fiscal Studies, NI increases are forecast to raise almost £13 billion per year for the NHS and social care, with around 40% of the revenue generated by employer NIC. The increase in dividend tax is forecast to raise under £1 billion by 2026/27.
For employers, the rise in NIC means the value of using salary sacrifice schemes for qualifying benefits such as pension contributions is greater. £1,000 sacrificed from salary for pension contributions by an employee will save them £132.50 NIC and the employer £150.50 from April 2022 (assuming the Employment Allowance is fully utilised and the employee’s earnings are in the main band), a combined 28.3% improvement. Consider setting up employee’s regular contributions as salary sacrifice, as well as traditional flexible benefits for extra contributions (e.g. in lieu of a cash bonus in whole or in part).
If you’re not sure how the new changes will affect your business or how to lessen the impact, get in touch with the friendly, approachable experts at CRM on 01865 379272.
