Income tax and NICs

Income tax rates and allowances

No changes were announced to the income tax rates so that the basic rate of income tax for 2022/23 will remain at 20%, the higher rate at 40% and the top (or additional) rate of income tax at 45% for English, Welsh and Northern Irish taxpayers (different rates apply to Scottish taxpayers).

As previously announced and enacted in Finance Act 2021, a number of allowances and thresholds have been fixed for a number of years. These include setting the personal allowance for 2022/23 at £12,570, and the basic rate limit for 2022/23 at £37,700. These thresholds will remain set at £12,570 and £37,700 for 2023/24, 2024/25, and 2025/26, rather than rising in line with CPI.

As part of the introduction of the Health and Social Care Levy, the rates of tax on dividends will increase by 1.25% (see Health and Social Care Levy below).

For a table of the main tax rates and allowances for 2022/23, see our HMRC tax rates and allowances page.

National insurance contributions

As part of its plans to introduce a new Health and Social Care Levy (see below), the government will temporarily increase the rate of NICs for one year from April 2022 for employees, self-employed and employers by 1.25%. The increase will apply to Class 1 (Employee, Employer) and Class 4 (Self-Employed, including partners) National Insurance, and to the main and higher rates. The increase will not apply to Class 2 NICs (the flat rate paid by the Self-Employed with profits above the Small Profits Threshold, which is currently £6,515 per year) or Class 3 NICs (voluntary contributions for taxpayers to fill in gaps in their contributions’ records to qualify for benefits).

As a result, Class 1 NICs for employees will temporarily rise to 13.25% with the additional 2% rate increasing to 3.25%, whilst employers’ Class 1 NICs will increase to 15.05%. From April 2023, the 1.25% Health and Social Care Levy will be formally separated from NICs and NICs rates will return to the earlier levels.

The government will use the September 2021 CPI figure of 3.1% generally as the basis for uprating National Insurance limits and thresholds for 2022/23. This excludes the Upper Earnings Limit and Upper Profit Limit which will be maintained at 2021/22 levels in line with the higher rate threshold for income tax.

Health and Social Care Levy

The government has previously announced plans to introduce a new Health and Social Care Levy at 1.25% in order to pay for increased spending on health and social care measures, including a cap on social care costs. In addition, taxes on dividends will be increased by the same amount. The measures were included in the Government’s document putting forwards its proposals for health and social care reform, “Build Back Better”.

In the short term, the new tax will take the form of increased NICs, for both employers and employees (see above). From 2023, the increased NICs will be formally replaced by the new Health and Social Care Levy, which will also apply to those above State Pension age who are still in employment. Revenues from the Levy will be ringfenced for health and social care. Together with the increase to the rates of dividend tax, the Levy is expected to raise an additional £12bn per year for health and social care across the UK.

The government will also increase the rates of tax on dividends by 1.25% from April 2022. This change will see dividend rates increase from 7.5%, 32.5% and 38.1% (ordinary rate, upper rate and additional rate) to 8.75%, 33.75% and 39.35% from April 2022. The dividend trust rate will also be increased to 39.35% from April 2022. The revenue from this increase is also intended to help to fund the increased spending on health and social care costs (though is not formally ring-fenced). However, many smaller investors will be unaffected due to the £2,000 tax-free dividend allowance. As a result, the government estimates around 60% of individuals with dividend income outside of ISAs (which are not subject to tax) are not expected to pay any dividend tax or be affected by this change in 2022/23. Dividend income from shares is not subject to NICs (or the Levy) and no doubt the Government is concerned that many business owners would simply choose to pay themselves increased dividends rather than salary in the absence of a matching increase.

This change will apply UK-wide and will be legislated for in the next Finance Bill.

Basis period reform

Following government consultation during 2021, the government has today announced that it will be reforming the income tax basis period system for unincorporated businesses, including trades conducted through partnerships and LLPs. The aim of this new measure is to simplify the method for allocating trading profit to specific tax years by taxing profits arising during the tax year. This will involve changing the basis period from a ‘current year basis’ to a ‘tax year basis’ such that a business’s profit or loss for a tax year would be the profit or loss arising in the tax year itself, regardless of its accounting date. The reform will take effect for the 2024/25 tax year with a transition year in the 2023/24 tax year. This will impact individuals, trusts, partnerships (including trading LLPs) and other unincorporated entities with trading income that is subject to income tax.

For businesses that do not draw up their accounts to 31 March or 5 April, there will be an apportionment of profits to determine the profits treated as arising in the tax year. Introducing the ‘tax year basis’ for trading income will also bring the payment of tax closer to the time that profits are earned.

Legislation in Finance Act 2022 will introduce special rules for the one year transition period (2023/24) which will impact the way that the basis of taxable profits for the 2023/24 tax year is determined - for example, the basis period for a business with a 30 September year end will comprise (i) taxable profit for the year ended 30 September 2023, plus (ii) a transition component consisting of taxable profit from 1 October 2023 to 5 April 2024. Any overlap profits will need to be relieved in full in 2023/24 and will not carry forward into the tax year basis.

For businesses with higher profits in 2023/24 due to the change in basis, the government is legislating to automatically spread the transitional period additional profits over a period of five years (with the option for businesses to elect out of spreading the additional profits, accelerating the charge, if preferred). It seems, however, that a number of points stakeholders had raised, such as the request for spreading to operate over a longer period of ten years, or for spreading to apply to the tax due on the additional profits rather than the profits themselves, may not be reflected in the draft legislation when released.

Power to make temporary modifications to taxation of employment income

The government has confirmed it will introduce legislation to allow HM Treasury, under ministerial direction, to make regulations to make temporary modifications to Parts 3, 4 and 5 of the Income Tax (Earnings and Pensions) Act 2003 for a period of up to two tax years in the event of a disaster or emergency of national significance as determined by HM Treasury. The power will only be able to be exercised in a way that is wholly relieving to the taxpayer and will not be able to be used to create a tax charge.

The changes will enable the government to support taxpayers, for example by:

• Exempting benefits in kind of a specified description from income tax where appropriate
• Changing the qualifying conditions for exemptions on benefits in kind
• Exempting specified reimbursements from the charge to income tax
• Providing relief for specified expenses

The changes are presumably intended to allow the government to react nimbly to emergency situations such as COVID. Changes were made to various employment tax measures on a temporary basis in response to COVID, including in relation to the provision of COVID tests by employers to employees and the reimbursement by employers of employees’ expenses for home office equipment. The existing legislation only allows changes to be made through regulations rather than statute in limited circumstances. The changes announced today should therefore enable the government to respond quickly to future disasters or emergencies in relation to employment taxes.