8 September 2021
Yesterday, the UK Prime Minister Boris Johnson, announced increases to both National Insurance rates and dividend tax rates, in an attempt to boost the NHS (our National Health Service) and fund reforms to the social care system.
These changes will impact almost all individuals working in the UK, including those employed by overseas companies.
The rates of National Insurance contributions (NICs, which is our social security) in the UK vary depending on employment status earnings. Most UK employees contribute 12% on weekly earnings between £184.01 and £967, and 2% on anything above that. Employers also contribute, generally, at a flat rate of 13.8% for their employees’ weekly earnings above £170.
From April 2022, NICs rates will rise by 1.25% for employees and employers.
From 2023, the additional 1.25% will be ring-fenced as a new health and social care levy. This levy will be paid by employers and all working adults, including those over the state pension age (unlike other NICs) and those who are self-employed.
Currently, dividends in the UK are taxed at 7.5% for basic rate taxpayers (with increased rates for higher and additional rate taxpayers). Individuals also currently have an initial £2,000 tax-free allowance for dividends.
Dividend tax rates will rise by 1.25% from April 2022. The tax-free allowance for dividends is unchanged, however.
Most working individuals will be affected by these manifesto-bursting increases in some way or another and pensioners will be alarmed by both the door being opened to NICs charges in retirement, as well as the (temporary) abandonment of the so-called pension “triple lock”. Despite the recent review into capital taxes, there is so far no change proposed to capital gains tax (one of the few taxes the Government haven’t committed not to increase). So, we may yet see more rises and change elsewhere.
With that in mind, from an incentives point of view, the UK’s tax-qualified share plans may prove to be more popular than ever.
Under a Share Incentive Plan (or SIP) for example, shares are free from income tax and NICs if kept for 5 years. Dividends can also be reinvested in the SIP free of income tax and NICs, provided the “dividend shares” are then held in the plan for 3 years. Save as you earn plans (or SAYE) also allow for income tax and NICs savings, on the increase in value of any shares.
Elsewhere, Enterprise Management Incentives (or EMIs) and Company Share Option Plans (or CSOPs) also allow individuals to benefit from income tax and NICs and relief in certain situations.
Whilst the UK’s tax-qualified plans offer different benefits, they all provide ways in which individuals can pay less or no income tax and NICs. With the proposed rises to NICs, these plans should be looking more appealing to employers and employees alike. In addition, global employers will need to review their UK award documents generally and consider, in the long run, if references to social security will need to be updated to also refer to the health and social care levy.
If you have any questions regarding these changes, or your share and incentive plans generally, please do contact us and we would be happy to help.
Chris Fallon, Sarah Bruce & Tom Parker