At the start of the next tax year, National Insurance contributions and dividend tax rates are set to increase by 1.25 per cent.

This increase, part of a ring-fenced health and social care levy, will take effect from the start of the 2022/23 tax year, on 6th April 2022.

This gives businesses and their tax planning accountants six months to prepare for the changes and make the most of their earnings over the next six months.

The increase will affect class 1 (employee contributions), class 4 (self-assessment for self-employed) and the secondary class 1, 1A and 1B bands (paid by employers), as well as dividend payments, which collectively equates to the primary source of income for many people.

Here are some ways to plan effectively for the change.

Keep Employees Informed

Be sure to work with payroll and human resources teams as soon as possible to ensure that the business is meeting its obligations and deducting the right amount.

Keep staff in the loop about this, both immediately as the increase has been announced and leading up to the start of the next tax year. There will be some people who are upset about this, and they should know this was a mandated step and not a business decision.

Assess The Financial Impact

Ensure that adequate forecasting and impact assessments are undertaken to see how the change affects the viability of the business as it presently stands.

If your business needs to make drastic changes, up to and including redundancy, forecasting and planning as soon as possible will enable a fair, careful, fully consulted and conscientious process that balances the needs of the business with the needs of employees.

This financial planning can also be used to plan for potential further changes, as are expected from the start of the 2023/24 financial year.

Avoid Drastic Reactions

The key to any response to any change in a business environment is to avoid drastic responses. Some organisations may consider hiring more casual employees or relying on self-employed contractors, but this must be undertaken without breaching IR35 legislation.

Consider Salary Sacrifice Schemes

One option that can be potentially effective, especially for small businesses, is the use of a salary sacrifice scheme, where part of a salary payment is paid into a tax-free benefit, such as childcare, additional pension contributions or work-related training schemes.

Whilst the scope of these schemes are limited, they can provide a considerable tax benefit when used correctly, allowing both employees and employers alike to make the most out of earnings.