To help the UK’s economy recover from the devastation caused by the coronavirus pandemic, the government has announced a 1.25% increase in National Insurance (April 2022), as well as a new Health and Social Care Levy (April 2023). A rise in National Insurance was perhaps unavoidable. However, the self-employed are yet again feeling neglected by the government because they could be the ones who suffer the most. Keep reading, and we’ll share the thoughts of industry experts on the upcoming rise to National Insurance, as well as what it means for contractors, freelancers and temporary workers.
What’s happening – an overview
To help the UK’s economy bounce back from the severe impact of the coronavirus pandemic, Prime Minister Boris Johnson has announced an upcoming increase to National Insurance and dividend tax, as well as new health care and social plan. The changes will roll out in April 2022. However, from April 2023, the extra National Insurance Contributions will be a separate tax – the Health and Social Care Levy.
Umbrella company contractors
Those working through an umbrella company will witness their pay retention decline slightly, as they’ll see a 1.25% rise in both the Employer’s National Insurance and Employee’s National Insurance contributions. Hopefully, responsible recruitment agencies and end-hirers will acknowledge the impact this will have on temporary workers and, consequently, offer an uplifted rate. However, while some will be happy to oblige, others will almost certainly turn a blind eye.
Unsurprisingly, the self-employed are unimpressed. Let’s not forget that due to IR35 changes over the last few years (off-payroll in the public and private sectors), thousands of PSC contractors have seen their pay retention decline because they’ve been required to switch to an umbrella company. Now, pay retention is being reduced again.
Contractors with a personal service company (PSC)
Traditionally, contractors with a personal service company (PSC) pay themselves a minimal salary and take out the rest of their money with dividends – the most tax-efficient way to operate outside IR35. However, this method of payment will not be as efficient for contractors after April 2022.
The 1.25% rise in National Insurance will impact even the smaller salaries contractors are paying themselves through a personal service company. And, there is an increased rate of dividend tax coming into effect from April 2022 too:
- Basic rate dividend tax will rise to 8.75% (previously 7.5%).
- Higher rate dividend tax will increase from 32.5% to 33.75%.
- Additional rate dividend tax (applies to those earning over £150,000) will rise to 39.35% (previously 38.1%).
What are people in the industry saying about the upcoming rise to National Insurance and dividend tax?
Expectedly, many stakeholders within the contractor payroll industry have leapt to the defence of the self-employed and have expressed their dissatisfaction with Prime Minister Boris Johnson.
Andy Chamberlain – Director of Policy at the Association of Independent Professionals and the Self-Employed (IPSE):
“After the financial damage of the pandemic, exclusion from support and the changes to IR35 taxation, this new tax hike on dividends will make it almost impossible for freelancers to continue to work through a limited company. To limited company directors – from project managers to graphic designers – this is salt in a year of wounds.
The increase in National Insurance for sole traders will also be deeply damaging to the wider self-employed sector. While social care is of course crucial for the country, after the financial devastation of the pandemic, it is simply not right that hard-working and often struggling people – particularly the scarred self-employed sector – should be paying for it. These changes will squeeze the battered self-employed community – limited companies and sole traders alike.”
Joanne Harris – Head of Technical, Compliance and Payroll at SJD Accountancy, an FCSA accredited Limited Company Advisor:
“The Government’s new 1.25 percent tax on share dividends for the health and social care levy will not be welcomed by the majority of freelancers and contractors, particularly those with a limited company set up.
It’s important to remember that despite a huge push, these types of workers were completely excluded from the Government’s financial support mechanisms like the CJRS and SEISS during COVID-19. The Government have broken an election manifesto promise with this change but have blamed that on the impact of the pandemic – that will be a bitter pill to swallow for those contractors and freelancers that were given no financial support.
The need to reform social care spending in the UK has been on the agenda for many years, but to announce this just as the economy starts to bounce back will not help to boost confidence among the UK’s flexible workforce.”
Chris Mattingly – CEO of IR35 Navigator:
“While no one can deny the importance of social care funding, the 1.25% tax hike faced by both employee and employers is going to hit contractors particularly hard.
Whether operating inside or outside IR35, the average contractor will now face significantly higher costs as a result.
[But it is] lower paid umbrella contractors [who] are likely to be hit the hardest. [If the levy was] applied today, and without any supporting increase in day rates, a typical umbrella worker on a £200 a day, will be £13.70 worse off – each week.”
Chris James – A Director at JSA Accounting, an FCSA accredited Limited Company Advisor, and Umbrella Employment accreditation holder:
“For contractors, many of whom will still be suffering from the inequalities of furlough, the impending corporation tax rises, and the implementation of the new off-payroll working rules earlier this year, [with this new levy] they will now be forgiven for feeling targeted again.”
Matt Fryer – Head of Legal Services at Brookson Legal:
“This means that umbrella company employees will be hit twice as hard in terms of take-home pay.”
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