Dividend and NI Tax Rate changes

The UK government has confirmed the tax rises for National insurance and dividends will go ahead, coming into effect from April 2022. The objective of this manifesto-breaking tax rises is to help the government raise revenue to help fund the health and social care settlement announced last year. The Government expects an additional £12 billion per year to be raised, which will be used to support the NHS.

The policy will mean National Insurance rates are set to rise by 1.25 percentage points for all workers currently paying Class 1, Class 1A, Class 1B and Class 4 national insurance. However, the tax rises will not apply to Class 2 or 3 NICs. From April 2023, the 1.25 percent social security charge will be separated from NICs as a new “Health and Social Care Levy,” and the 2022 increases in NIC rates will be reversed. The government Is also asking employers to include the following message on the payslips, ‘1.25% uplift in NICs, funds NHS, health & social care’. The aim of this is to emphasise to employees what this tax rise is helping to fund.

The increase in NI is considered as highly controversial as the UK is facing a worsening cost of living crises, with inflation at 5.5%, a 30 year high. Officials at the Bank of England are also forecasting that the squeeze on living will continue with inflation peaking at 7% this spring. Estimates calculate that with a £20,000 salary, NI contributions will rise by £130 per year and on a £40,000 salary, the contributions will rise by £380.

Individuals who receive dividend income will also face a higher tax bill as all rates of dividend tax will increase by 1.25% from April 2022. The dividend tax is applicable on dividend income above the frozen £2,000 dividend allowance and above the £12,570 personal allowance. Dividends on assets held in ISAs are excluded from the dividend tax. Overall, the tax rise will mean an extra £12.50 tax per £1,000 of dividends received during 2022/23.

The government estimates this tax hike will affect 2.5 million people this year and have an average loss of £335.

The dividend rates will change to the following:

  • Basic rate increase from 7.5% to 8.75%.
  • Higher rate increases from 32.5% to 33.75%.
  • Additional rate rises from 38.1% to 39.35%.


These announcements go hand in hand with the first increase in corporation tax for 50 years, rising from 19% to 25%. Ultimately, the dividend tax increase will affect many small business owners who pay themselves a modest PAYE salary and take the remainder through dividends.