Corporation Tax, Payroll & pensions, Personal Tax

More tax rises are on the way – what are your options?

Luke Fletcher

Luke spent a decade at two of the UK’s largest accounting firms delivering tax advice to household names. Frustrated by the lack of tax advice offered to small businesses, and the 'once a year' compliance led approach from most traditional accountants Luke set up Raw. Using his experience, Luke now helps owner managed and entrepreneurial businesses take back control of their finances through simple, jargon-free advice. As an ICAEW Chartered Accountant and tax advisor, Luke loves nothing more than helping his clients pay less tax and maximise their earnings. Commercially minded and pragmatic, Luke prides himself on building long lasting, trusted client relationships.

September 10, 2021

More tax rises are on the way with National Insurance rates set to rise by 1.25% from April next year, and Dividend tax rates also subject to the same increase. That’s a hammer blow to owner managed businesses who were told only a few months ago in the Budget that from 2023 corporation tax rates will be increasing for those with profits above £50k.

Tax efficient profit extraction just got a little bit harder, but thankfully there are still plenty of simple tax planning ideas to consider.

Before we dive into those, let’s just recap the tax rises to National Insurance and Dividends – because as always with tax, the devil is in the detail.

Increase in National Insurance

From 6 April 2022, employees, employers and the self employed will all see a 1.25% rise in National Insurance Contributions (NIC). For the tax geeks amongst you that’s because primary and secondary Class 1’s, Class 1A’s, Class 1B’s and Class 4’s will all be subject to the 1.25% rise.

Of course, the government know that many owner managed businesses structure their tax affairs with a low salary and higher dividends. This helps to keep any national insurance to a minimum whilst still contributing as a qualifying year for State Pension purposes – read more here. So, with that in mind, the Gov’t have also announced a 1.25% increase to Dividend tax rates. The £2,000 Dividend Allowance is still available, so the higher rate will apply to any dividends over and above this amount received in a tax year.

Crucially, that will also increase the corporation tax charge on overdrawn Director’s loans – so if you’re Director’s loan accounts overdrawn (you owe the business money) then get in touch with us to find out more.

Parking the politics (there are lots of reasons this is considered regressive as the Guardian explain here) everything considered, for most owner managed businesses these tax rises are going to increase your tax bill one way or another and for those with employees you’ll likely see an increase in the National Insurance your business suffers too.

Of course, from 2023 National Insurance returns to its current level – and the 1.25% will be known as the Social Care Levy…call it what you want, it’ll be a 1.25% tax with potentially a new set of thresholds (o joy).

A few simple planning points

Thankfully, lots of straight forward tax planning ideas that we preach to our clients week in week out still apply and will help minimise the effect these tax rises have on your tax affairs.

The quick win – the new rules come in to force 6 April 2022. That means a dividend paid out on 31 March 2022 is potentially 1.25% cheaper than one paid out 6 days later. Timing is everything and so we’ll be speaking to all of our clients individually to consider what dividend is appropriate for the current tax year.
Director pension contributions remain highly tax efficient – company Directors can contribute up to £40k per annum in to their pension. This is completely tax free for the Director and attracts a corporation tax deduction for the company. Read more about Director Pension Contributions here.
Apprentices and veterans – employer secondary NI contributions aren’t required for most apprentices under the age of 25 who are in a statutory apprenticeship. Nor are they required for veterans in the initial 12 months of their first civilian employment. With the rise in NIC these exemptions are now more beneficial.
Got employees? Then reduce your employee and employer national insurance bill with pensions salary sacrifice. Once again, this rise in NIC has just made salary sacrifice even more valuable. Most large organisations have been doing it for years so maybe it’s time make the switch – Find out more here.
Tax free and low tax benefits – there’s a whole range of tax-free or very low tax benefits which can be utilised by owner-directors and employees. This article has 15 tax free benefits. For those considering electric cars, these remain highly tax efficient for 2022, read more about electric car tax here.
Directors working from home? Consider charging your business rent. This can be a tax efficient way to extract money from your business whilst also helping to offset additional household costs incurred as a result of running your business from home. Find out more about use of home.

Round up

Targeting national insurance and dividend tax rates is no mistake – the Gov’t intention is that almost everyone of working age be subject to an increase in tax one way or another. But from experience, we know that most small businesses are still missing out on simple tax ideas and allowances that have the potential to save thousands. Take action today and book a call with our founder to see what we could save you.