HMRC recently have announced increase in NIC & Dividend tax rates. You may have already heard about this news already but you need to know the complete picture and implications of this tax.
Why Increase?
Prime minister confirmed that this increase in tax will be used towards government spending for Corona virus initiatives and will be part of UK NHS (National Health Service).
The step taken because of the announcement by prime minister for an initiative called Government’s plan for health and social care.
6.7688_CO_Command paper cover_060921 (publishing.service.gov.uk)
In the above link you will find a document published by UK Government.
So basically we can conclude that the excess tax will be utilized for society and for betterment of health of people of UK.
But I think this can reduce the growth in economy because, disposable income of the tax payers will reduce and will result into decrease in demand. Lots of experts are saying that if government do not run budget deficit then UK may face a recession also in future.
Increase in NIC
From April, 2022, Employed people have to pay extra 1.25% Class 1 employee NIC. The Same way, self employed people will also see the increase in liability by 1.25% because of increase in class 4 NIC.
Interesting thing is that this rise in NIC is not just for employee, employer Class 1 & 1A NIC rate will also increase by 1.25%
My concern here is that employee if paying higher NIC then they will get health service from government but how the employers will recover this tax and how they will get the benefits for this NIC.
Right now we can’t do anything, we have to accept the fact.
Another thing is that this from April, 2023 Government is planning to collect some of the NIC from the people over state pension age but are employed/self employed. Right now they are exempted from NIC, but in future they will also have to pay NIC.
Is this Temporary? Really?
NIC increase is temporary according to government’s declaration. After 1 year from April, 2023 NIC rates will once again go down at a current rates.
It may look that this tax increase is temporary but it’s not.
HMRC will reduce the NIC after 1 year but they declared that they will introduce the new Health and social care cess/levy @ 1.25% from April, 2023
So basically tax collection through NIC is temporary after that the same tax will be collected in the name of Cess.
Dividend tax rates:
Government is not just increasing the NIC but also Dividend tax rates.
Right now, its 7.5%, 32.5% & 38.1%
But after 1.25% increase in each rates, it will be 8.75%, 33.75%, 39.35%
This increase will going to affect the Higher and additional rate tax payer majorly.
Also the dividend nil rate band of 2000 will not be affected and will be available same way.
Prime Minister projected that almost 12 Billion GBP will be raised for Plan for Health and Social care and 11.4 Billion amount will come from the cess.
I hope that you liked the blog and found it very simple to understand. We here tried to cover almost every detail which is important for ACCA or any other basic level student.
For any query feel free to contact me personally.
Dipan Ghataliya