National Insurance and dividend tax increases on the way

The Prime Minister recently announced rises in National Insurance, in the form of a new Health and Social Care Levy, and dividend tax rates. The COVID pandemic has hit the economy hard and as we see the after-effects, these may be the first of many tax rises to come over the next few years.

What is the new Health and Social Care Levy?

The Health and Social Care Levy will come into effect from April 2022 and be an additional charge of National Insurance for employees and employers, paid directly to the National Health Service and social care. Once HM Revenue & Customs have their systems in place to manage this, this will change to a new and separate ‘levy’, with NI rates reverting to current levels.

What increase will arise with the Levy and who will pay it?

The increase is 1.25% and will apply to Class 1, Class 1A, Class 1B and Class 4 National Insurance contributions.  However, it wasn’t originally made clear that the levy will also affect employers, meaning their contribution rate of 13.80% will increase to 15.05%.

This increase will only apply to earnings over the current NI thresholds, so for example anyone earning below £9,568 still won’t be paying any National Insurance contributions.

In addition to employees, the levy will apply to all workers whether self-employed or employed, and also anyone over state pension age who is still working.

What will be the effect on me?

This levy will affect everyone who works and earns over the threshold.

From April 2022 the 1.25% will be added to your National Insurance contributions. This will change, likely from April 2023, and be treated as a new levy and should show as a separate entry on your payslips or tax returns.

This news has worried a lot of employers of all sizes, but particularly small employers. I hasten to use the words ‘the good news is’, but a lot of ‘small’ employers don’t actually pay employers National Insurance because they claim the Employment Allowance. This is a £4,000 annual allowance that eligible employers can offset against their National Insurance contributions. Therefore, for the employers who claim this, and have some levy spare, they likely won’t physically pay the additional 1.25% levy.

And what about the dividend tax increase and what impact will this have?

There will be an increase in all dividend tax rates of, again, 1.25% from April 2022. All individuals currently have an entitlement to a £2,000 dividend allowance so the change will only impact those who have dividend income in excess of this during the tax year.

The impacts are more likely to be felt by those with high value investments or owners of small companies who draw regular dividends which make up a significant part of their income. Such business owners may consider the possibility of bringing forward dividend payments to the current tax year before the new rates kick in.

The rate will increase from 7.5% to 8.75% for a basic rate taxpayer. The higher and additional rates will rise to 33.75% and 39.35% respectively.

Questions and support

If you have any questions or concerns about how the new levy or increased dividend rates will impact you as an individual or business owner, please do not hesitate to get in touch to talk through some worked examples to ensure you are prepared for April 2022.

COVID-19 Redundancy Pay Level Protected

The UK Government has confirmed that in the event of redundancy, workers’ wages will be protected regardless of being on furlough.

In response to a minority of firms taking advantage of the current COVID-19 pandemic to pay a lower rate of redundancy, any furloughed workers that lose their jobs will now be eligible for redundancy pay based on normal wages, rather than the furlough rate. The UK’s 95 million furloughed workers are currently only being paid 80% of their normal wage, raising the anomaly in redundancy pay level.

Workers with more than 2-years continuous service that are made redundant are usually entitled to a statutory redundancy payment that is based on their length of service, age and pay up to a maximum statutory level. Additionally, the new law will also apply to statutory notice pay, which is where employees must be given a notice period before their employment ends. Notice periods can vary from one week to up to 12 weeks’ notice, depending on length of service. Another change will ensure basic awards for unfair dismissal cases will be based on full pay, rather than furlough-level wages.

It is estimated that 150,000 people have so far been made redundant during the crisis, but there are estimates that this figure could climb much higher, especially when the Government’s furlough scheme ends in October. Indeed, the National Institute of Economic and Social Research think tank warned that the ending of the furlough scheme could lead to 1.2 million people being unemployed by Christmas.

In a recently announced step by the UK Government to encourage employers to retain staff, further details about the Job Retention Bonus Scheme have been publicised. The plan will see businesses receive a one-off payment of £1,000 for every previously furloughed employee that earn at least £520 a month on average, if they are still employed at the end of January 2021.

To claim the bonus, employers will need to have relevant up-to-date payroll RTI records for the period to the end of January, and for an employee to be eligible employees must have been paid at lease £520 a month on average between 1 November 2020 and 31 January 2021. Details guidance on the process of how to claim the bonus will be issued in September 2020.

The Employment Allowance is changing

What is the Employment Allowance?

The UK Government provides an annual allowance of £3,000 to employers, which they can off-set against their employers’ (secondary) Class 1 National Insurance Contributions (NICs).  It was introduced as an incentive for organisations to help recruit their first employees or expand existing work forces in addition to providing a restriction for existing employers.

 

What is changing?

The Government has announced a change to Employment Allowance legislation effective from April 2020.  The allowance will only be available to employers with a secondary (employer’s) NIC liability of £100,000 or less.  The amendment essentially withdraws the allowance for medium to large sized organisations, it is estimated that over 100,000 employers will be affected.  Over 99% of micro-businesses and 93% of small businesses will still be eligible for the allowance.

An additional complication is that by restricting the allowance to employers with a less than £100,000 secondary NIC’s bill, the allowance will now be classified as State Aid.  Going forward, the rules on de minimis State Aid will need to be considered by employers before claiming Employment Allowance, if it applies to their organisation.  Employers will need to make sure there is availability within their sector’s state aid budget to claim Employment Allowance before they do so.

Which organisations will be able to claim Employment Allowance from next year (2020/2021 tax year)?

  • All businesses and charities paying employers’ NICs with an employer’s NIC’s liability of under £100,000
  • Linked companies with a combined employers’ NICs liability of under £100,000

 

Which organisations will not be able to claim?

  • Employers with a secondary NICs liability of over £100,000
  • Linked companies with a combined secondary NICs liability of over £100,000
  • Single director payrolls where they are the sole employee
  • Employers who have only personal, household, or domestic workers on their payroll, excluding care or support workers
  • Public bodies or businesses doing more than half their work in the public sector, excluding charities
  • Service companies working under ‘IR35 rules’ whose only income is the earnings of the intermediary

 

What should organisations do about the change?

There are five action points for employers to complete which will ensure that compliance obligations are met.  Employers must:

  • Have checked their employer National Insurance liability for the previous tax year was less than £100k
  • They have undertaken relevant checks with any connected businesses to ensure they are eligible for the employment allowance
  • Are the only connected business claiming the Employment Allowance
  • Will not exceed the relevant de minimis ceiling for state aid in their sector if they claim the Employment Allowance
  • They are not aware of any other reason why they may be excluded from claiming the employment allowance

If you have a query about the change to the Employment Allowance, contact the Chiene + Tait Payroll Team today at payroll@chiene.co.uk or call 0131 558 5800.

How to play the pension re-enrolment roundabout

As part of your ongoing auto enrolment duties, you are responsible for automatically re-enrolling all eligible job holders who are not active pension members back into your organisation’s pension scheme every three years following your initial auto enrolment staging date. This is known as statutory pension auto re-enrolment (sometimes named “cyclical re-enrolment”).

Planning ahead for this is essential to ensure that you are aware of your duties and obligations, and to know what actions you are required to take. Here are some hints and tips to help with this process.

Choose your re-enrolment date

There is a six month window to choose a suitable re-enrolment date, which extends. three months either side of the third anniversary of your staging date. For example, if your staging date was 1st June 2013 then your six month window would be between 1st April 2016 and 30 September 2016.

You cannot apply for a postponement period and you must use the same re-enrolment date within the three year period for all employees.

There is no requirement to inform The Pension Regulator of your chosen re-enrolment date until completing the re-declaration of compliance.

Assess your employees

You will need to carry out an assessment of any employees who have, more than twelve months prior to the chosen re-enrolment date:

• opted out of your automatic enrolment pension scheme;
• stopped paying pension contributions after the opt-out period ended; or
• reduced their contributions to below the minimum level set by the government.

You also have the option to re-enrol eligible jobholders who left the scheme or reduced their contributions within the 12 month period prior to your chosen re-enrolment date, however you are not obliged to do so.

Re-enrol your employees

After assessment, any eligible employees must be re-enrolled into a qualifying pension scheme within six weeks of the re-enrolment date. You should also write to all employees affected by re-enrolment within the same six week window.

Opt out

As with auto enrolment, a one-month window applies during which, re-enrolled eligible employees will have the opportunity to opt out or cease membership if they choose to. Opt out notices should be processed, refunds issued where necessary and records kept accordingly.

Re-declare

A re-declaration of compliance must be completed and submitted to The Pension Regulator, regardless of whether you have employees to re-enrol within five calendar months of the third anniversary of your staging date (or last re-enrolment date). If you do not complete the re-declaration on time you could face a fine from The Pension Regulator or even prosecution.

Once you have submitted your re-declaration to The Pensions Regulator, they will send an acknowledgement letter. This will complete your cyclical re-enrolment duties until your next re-enrolment window in three years time.

A link to the online re-declaration is provided below:

https://www.autoenrol.tpr.gov.uk/

If you have a question about pension auto-enrolment or re-enrolment, don’t hesitate to get in touch at payroll@chiene.co.uk.