HSC Levy and increased dividend tax rates

The new HSC Levy of 1.25% will come into effect initially by increasing the national insurance (NIC) rates for employee primary class 1 and class 4 NIC in 2022/2023.  Employer class 1 NIC will also be increased by 1.25%, as will class 1A & class 1B NIC which is charged to employers on benefits in kind and PAYE settlement agreements respectively.  In 2023/2024 the increased NIC rates will revert and will be replaced by a separately identifiable HSC Levy.

In operating a separate levy, there is a distinct difference for those above state pension age who are still earning, where national insurance is not normally a relevant cost to the individual.  After a 12-month reprieve, those above state pension age who are still earning will be subject to the levy with effect from April 2023.

Alongside this, an increase in the tax rates applicable to dividends of 1.25% will also be introduced for 2022/2023 and for future years.  The dividend allowance of £2,000 will be retained, meaning an individual can receive up to £2,000 of dividend income per annum without suffering a tax charge.

For many years, owner-managed businesses have compared the overall net extraction taxes of dividend versus salary, with dividend more often than not giving the most attractive extraction rates, when other factors such and Research & Development are not in play.  However, in the wake of the increase in dividend tax of 1.25% on 6 April 2022, and corporation tax increasing to 25% from 1 April 2023, the maths of extraction will be much more closely aligned in future years.

For those individuals who extract all profits from their business, the unincorporated route could potentially be more tax-efficient.  That said, where a business owner does not extract all profits, a corporate route can still offer the flexibility of managing higher extraction costs, and as such, year on year, may still offer a better overall position. 

The increase in the dividend rate also has a knock-on effect with regard to s455 corporation tax which is payable on directors’ loan accounts which are overdrawn at the accounting year end but are not cleared by 9 months and 1 day following said year end.  The rate of s455 tax is directly linked to the dividend higher rate of tax, which will mean that the rate of s455 tax will increase from 32.5% to 33.75% from 1 April 2022.

With the increase in dividend tax, and the introduction of the HSC Levy, remuneration is becoming a costlier affair for both individuals and employers.  It may therefore be a good time to revisit the wider remuneration offering made to a workforce, and whether looking at salary sacrifice, pension provision and low-cost or tax free benefits as part of a wider flexible benefits package may be more rewarding overall.