Health and Social Care Levy – a new tax

The Government has today announced a new plan for Health and Social Care, with an aim to help avoid individuals having to part with all their lifetime savings and assets to fund their care needs.

More specifically, the intention is that from October 2023, no eligible person starting adult social care should have to pay more than £86,000 for personal care over their lifetime.

It is no surprise after the huge outpouring of support by the Government through the Covid-19 pandemic that the plans require additional tax revenue to be raised, and as we have seen hinted in the last few days, it is National Insurance (NI) which is to be increased to fund this. There will, however, also be an increase to Income Tax on dividends.

This represents a break of a manifesto commitment made in 2019 not to increase Income Tax, National Insurance or VAT rates for the duration of this Parliament.

The change will see an additional 1.25% added to the Class 1 and Class 4 National Insurance rates from April 2022, for all profits and earnings above the lower earnings threshold (currently £9,568).

Class 1 NI is paid by both employees and employers, and Class 4 is paid by self-employed individuals and partners in partnerships.

The increases are shown in the table below:

NIC typeWho pays it?2021-22 rate2022-23 rate
Class 1 PrimaryEmployees12% on earnings from £9,568 to £50,280
2% on earnings over £50,280
Class 1 SecondaryEmployees13.8% on earnings over £8,84015.05%
Class 4Self-employed & partners9% on profits from £9,568 to £50,280
2% on profits over £50,280

To illustrate the effect, individuals with earnings or profits of £25,000 will pay £193 more per annum, and those with £50,000 will pay £505 more.

In the longer term, this additional NI will be re-badged as a “Health & Social Care Levy” and will be presented as a separate tax. NI rates will then revert to their current rates.

The released documents do not mention Class 1A, which is the employer liability on benefits-in-kind, but our assumption is that this will also increase from 13.8% to 15.05%. This should be confirmed in the fullness of time.

So that there is a contribution from those who derive their income from investments rather than employment or self-employment, there will also be an increase in the Income Tax rate on dividends.

Dividends falling into the basic rate of tax (up to £50,280) are currently taxed at 7.5%, after a £2,000 tax free dividend allowance, at 32.5% above £50,280 up to £150,000, and 38.1% above £150,000. These rates will therefore increase to 8.75%, 33.75% and 39.35% respectively.

Those deriving their income from property rentals will not be affected – although this is perhaps not surprising considering the tax increases and restrictions placed on landlords in recent years.

There will no doubt be further detail that emerges in the months between now and April 2022, including expected inflationary increases in the thresholds and bands.

These changes will greatly increase the attractiveness of certain tax planning mechanisms such as certain salary sacrifice arrangements. It is also likely to present other tax planning opportunities which will become clear over the next few months.

To discuss your situation please speak to your usual Randall & Payne contact on 01242 776000 or send a message using our Contact Us page.