New Tax Year – How Are You Affected?

1 April 2022

This month (April 6th 2022) sees the start of a new tax year. Here we look at the key changes that are taking place and explain how contractors and self-employed people are likely to be affected and we also look at the potential impact on recruitment businesses.

National Insurance

In his Spring Statement, Chancellor Rishi Sunak did not remove the 1.25% increase in NICs due to come into effect this month to help fund the NHS and social care. However, he did try to soften the blow by announcing a significant increase in the National Insurance Threshold from £9,880 to £12,570. This increase will see the alignment of the Primary Threhold (PT) for Class 1 NICs and Lower Profits Limited (LPL) for Class 4 NICs with the personal allowance of £12,570 from 6 July 2022.It has also been confirmed that the thresholds will remain aligned going forward.

The self-employed will see Class 2 NICs liabilities reduced to nil on profits between the Small Profits Threshold (SPT) and LPL. This will ensure that no one earning between the SPT and LPL will pay any Class 2 NICs, while allowing individuals to be able to continue to build up National Insurance credits. This change represents a tax cut for around 500,000 self-employed people worth up to £165 per year.

The table below (credit: BBC) illustrates National Insurance rates for employees. This will affect you if you are an Umbrella employee with Workwell.

 

 

The table below shows you how you’ll be affected if you’re self-employed and pay Class 2 and 4 National Insurance Contributions. This will impact you if you work through the Construction Industry Scheme (CIS).

Dividend tax changes

If you receive dividends (as a limited company contractor, for example) you will be subject to a further tax increase. Dividend tax rates are increasing by 1.25% though you can still early £2,000 in dividends tax-free. The table below illustrates the dividend rate changes.

Tax bands & allowances

The Government announced that the personal allowance and all income tax thresholds are frozen until 2026 and the current income tax rates will remain in place until at least the end of Parliament in 2024. The tax-free allowance of £12,570 remains. See the table below which summarises the tax bands.

Considerations for contractors

If you are an Umbrella employee, you need to be aware of the changes so that you can mitigate the impact on your day-to-day lifestyle and spending habits.

If you are a limited company contractor you should consider setting aside more income to cover your tax and National Insurance liability. You may also wish to take advice regarding investing in a pension, as this can be a tax-efficient way to receive income in later life.

Considerations for both recruitment businesses and construction sector contracting businesses

These changes in National Insurance will lead to increased labour costs at a time when there is already a shortage of workers in many industries. This may lead more organisations, especially those within the construction sector, where skilled workers may well have the option to work under the Construction Industry Scheme (CIS) as self-employed, to look at utilising such skilled workers as self-employed where they would otherwise previously have hired either permanent or temporary PAYE employees. Indeed, there could well be businesses tempted to stretch their definitions of self-employment status simply to get workers on board.

Whilst understandable, this is most certainly not recommended as there are numerous compliance hazards that shouldn’t be taken lightly. Businesses need to properly assess the risks they face and plan ahead, taking advice on what roles can be genuinely classed as self-employed. Whilst getting good workers on board is a top priority, short-term decisions shouldn’t be made without full consideration of the now significant compliance issues and risks.

In addition, the National Insurance changes could put pressure on wage bills. Recruitment agencies will need to think carefully about their minimum contract rates. We can provide support and expert guidance on these issues to aid decision-making.

Here to help

If you would like to discuss any aspect of tax with a member of our accountancy team, please get in touch.

If you are a recruitment business, we can help your business navigate the tax changes and minimise the impact. Get in touch with our Agency Support Team .

 

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