The government recently published the policy paper for the Health and Social Care Levy, which looks to impose a new tax to help fund the NHS.
What is the Health and Social Care Levy?
The government recently published the policy paper for the Health and Social Care Levy, which looks to impose a new tax to help fund the NHS and other equivalent bodies across the UK. The measure’s general proposals are that, from the 6th of April 2022, there will be a temporary 1.25 percentage point increase to both the main and additional rates of Class 1, Class 1A, Class 1B and Class 4 National Insurance contributions, as well as an increase on the rate of tax on dividends, making for a greater tax burden on both individuals and businesses. Come 6th April 2023, the National Insurance contributions rates will revert back to their current levels and be replaced by a new 1.25% Health and Social Care Levy that will go directly to supporting the UK’s various health and social care bodies.
How does this affect current remuneration strategies?
Right now, the effective rate of tax is cheaper for dividends than for salaries, meaning that the current remuneration strategy involves owners paying themselves a small salary as to make use of their personal allowance, then drawing additional amounts as dividends. Certain factors must be taken into account when executing this strategy, as dividends can only be paid if the company has distributable reserves. Moreover, even when considering the cheaper effective rate of tax for dividends, a salary may nevertheless prove a more pragmatic option if the business is relatively new or if the director requires regular earnings for the sake of personal credit.
Upon the introduction of the Health and Social Care Levy, the effective rate of tax will increase for both dividends and salaries, but the gap between the two will grow larger, meaning that dividends will prove even more effective in remuneration strategies.
Are there any alternative strategies?
Whilst dividends will continue to be utilised for remuneration strategies, the increase in the effective rate of tax on dividends will nonetheless encourage business owners to look to alternative strategies. For example, companies can currently make contributions to personal pension plans without being hit by National Insurance or corporation tax reductions. Although the amount of money that can be contributed is subject to limitations, this strategy enables profit extraction with a lower effective rate of tax, even if the extracted funds will not be usable by the company director for a period of several years.
Generally, the key point of consideration is whether or not remuneration strategies should be increased within the current tax year at lower tax rates, as this will increase tax burden in the short-term, but help prepare company directors for further tax rises in the future. With the government looking to alleviate the losses caused by the COVID-19 pandemic, further tax increases are likely prospects in the coming years, so it’s crucial that company directors weigh up both short and long-term possibilities to keep on top of incoming changes as well as the possibilities that the future might hold.
For more information on remuneration strategies or other advice related to business recovery, contact Voscap today at 020 7769 6831 or email team@voscap.co.uk to speak personally to one of our specialists.
