Modifications to National insurance contributions and dividend allowance

Let us delve into some of the modifications and their potential implication in the new financial year beginning 6^th April 2024,

NATIONAL INSURANCE CONTRIBUTION RATE CHANGE

One of the pivotal changes entails the reduction in Class 1 employee National Insurance Contributions (NICs) from 10% to 8%. This significant adjustment can impact the take-home pay of employees across various sectors.

Self-employed individuals are also affected by these changes, with a further 2 pence reduction in addition to the previously announced 1 pence cut to 8% at the Autumn Statement 2023. This brings Class 4 NICs for the self-employed down from 9% to 6%, aiming to alleviate the tax burden on self-employed individuals and foster entrepreneurship.

Another notable change is the abolition of Class 2 NICs. Self-employed individuals with profits exceeding £12,750 will no longer be obligated to pay Class 2 NICs. Despite this, they will retain access to contributory benefits, including the state pension. Similarly, those with profits below £12,750 but above £6,725 will receive access to these benefits through national insurance credits without the need to pay NICs directly.

Individuals with profits below £6,725 or those voluntarily paying Class 2 NICs to access contributory benefits will also maintain this option. However, the weekly rate remains frozen at £3.45 for the 2024 to 2025 tax year, instead of adjusting according to the Consumer Price Index (CPI).

DIVIDEND ALLOWANCE TAX CUT

The dividend allowance has undergone a significant reduction, halving from £1,000 to £500 as of 6th April 2024. This follows a series of reductions from £2,000 to £1,000 in previous tax years. Consequently, individuals whose total income, including dividends and wages, surpasses the personal allowance and dividend allowance thresholds may be subject to dividend tax.

The dividend allowance tax cut, set to come into effect from 6th April 2024, will significantly impact individuals, households, and families across the UK tax landscape. 

Affected individuals are those receiving taxable dividend income exceeding £500 from 6th April 2024. This change excludes dividend income from assets held in Individual Savings Accounts, which remain tax-free. According to the UK Government, it was estimated that around 3,235,000 individuals will be affected in the tax year 2023 to 2024, increasing to 4,405,000 individuals in the tax year 2024 to 2025. However, approximately 46% of those with taxable dividend income will remain unaffected in 2023 to 2024, decreasing to 27% in 2024 to 2025. The average financial impact on affected individuals is estimated at £125 for the tax year 2023 to 2024, rising to £155 in the tax year 2024 to 2025.

Regarding family dynamics, the dividend allowance tax cut is not expected to have a significant impact on family formation, stability, or breakdown. While financial adjustments may be necessary, the broader family dynamics are unlikely to be substantially affected.

while the dividend allowance tax cut necessitates financial adjustments for certain individuals and households, its broader impact on family dynamics is expected to be minimal. Effective support mechanisms and communication will be vital in navigating these changes smoothly.

In conclusion, these tax changes reflect the government’s ongoing efforts to strike a balance between fiscal responsibility and equitable taxation. Staying informed about these changes is crucial for individuals and businesses to navigate the tax landscape effectively and make informed financial decisions.