Written by Cormac Marum, Harwood Hutton’s Head of Tax Advisory

Tax hike to pay for the NHS & Social Care – what does it mean for you?

Boris Johnson’s announcement on September 7th of tax hikes to pay for the NHS & Social Care amounts to one of the biggest tax-raising measures in the UK for a long time.

The proposal was rushed through Parliament even though precise details were sparse at the time, but that was probably because it was not, officially, a ‘Budget’.

What is clear though is that the notoriously complex UK tax system is to become even more complicated.

As a result, it becomes more crucial for individuals to be aware of precisely how they themselves will be affected by these changes.

What is changing - and when?

Not only is there a 1.25% hike across the board, temporarily, in rates of National Insurance from April 2022 for both employees and employers which will morph, from April 2023, into a separate NHS & Social Care levy applicable on all earnings (even of those of pensionable age who continue to work), but there is also going to be a 1.25% hike in the tax paid on dividends.

This means that we shall all be paying more tax, which is presumably not exactly what the electorate had in mind in December 2019 when returning a Conservative majority in the General Election. So much has indeed changed over the past two years.

Salary vs dividend – which is the better option for owners and directors?

Following every Budget, the question always arises whether it is better for individuals to take money from their companies by way of salary or dividends?

The answer in the past used to be crystal clear – take enough salary to guarantee future entitlement to state benefits and take the rest in the form of dividends.

Over the years, the advantage from such a strategy has been significantly reduced with numerous changes to rates and other technical adjustments, like the abolition of the tax credit on dividends, which only tax professionals really understood.

Back in March in his Budget, the Chancellor, Rishi Sunak, announced that from April 2023 corporation tax was going to increase generally to 25% for companies with profits of £250,000 or more, with the rate staying at the current 19% only for those small companies with profits of no more than £50,000. Standalone companies with profits of between £50,000 and £250,000 would have a marginal corporation tax rate of 26.5%.

Those planned changes altered the landscape on the question of salary or dividends. From April 2023, the advantage of taking dividends was removed for standard and top rate taxpayers and from that date it appeared that they would be better off reverting to taking only salaries. With Boris Johnson’s latest announcement, it appears that the picture has changed once again.

Now, the general picture appears to be a swing back to taking dividends over salary (unless you are not a basic rate taxpayer and the company pays corporation tax at a marginal rate of 26.5%).

Why is this? Fundamentally, it is because if salary is taken the company has to pay 1.25% more in employer NIC and the individual faces a 1.25% increase in employee NIC. Whereas, if a dividend is taken, the individual faces only a single 1.25% increase on their dividend tax rate.

It appears that taking dividends rather than salary will alleviate part of the pain of Boris Johnson’s tax rises, but it won’t remove all of it.

Salary vs dividend comparison after Boris Johnson’s tax hike

Effective tax rates

Highlighted below are the lower effective tax rates for an owner-manager.

Current position

	Basic rate	Higher rate	Top rate
Salary	40.2%	49.0%	53.4%
Dividend	25.1%	45.3%	49.9%

 

From April 2022

	Basic rate	Higher rate	Top rate
Salary	42.0%	50.7%	55.0%
Dividend	26.1%	46.3%	50.9%

 

From April 2023 – where company pays corporation tax at 19%

	Basic rate	Higher rate	Top rate
Salary	42.0%	50.7%	55.0%
Dividend	26.1%	46.3%	50.9%

 

From April 2023 – where company pays corporation tax at 25%

	Basic rate	Higher rate	Top rate
Salary	42.0%	50.7%	55.0%
Dividend	36.1%	50.3%	54.5%

 

From April 2023 – where company pays corporation tax at 26.5%

	Basic rate	Higher rate	Top rate
Salary	42.0%	50.7%	55.0%
Dividend	32.9%	51.3%	55.4%

 

Written by Cormac Marum, Harwood Hutton’s Head of Tax Advisory

Disclaimer: Any views and opinions expressed in this article do not necessarily reflect the views and opinions of the Buckinghamshire Business First Group. They are solely those of the author/s.