On 8 September, the Government passed the Health and Social Care Levy Bill, which will see increases to National Insurance (NIC) and dividend tax rates. The £12 billion per annum additional tax revenue will be channelled predominantly towards the NHS, with an estimated £5.4 billion allocated to social care over three years.
The changes
From 6 April 2022, Class 1 NIC for employees and employers, and Class 4 NIC for the self-employed will increase by 1.25%. From 6 April 2023, the NIC rates will return to the current levels but a new Health and Social Care Levy (HSCL) of 1.25% will apply with essentially the same effect.
Under the current rules, individuals above the state pension age do not pay NIC (unless you are self-employed); from 6 April 2023, individuals over 66 will be subject to the 1.25% HSCL.
Dividend tax rates will increase from 6 April 2023 by 1.25%; however, the £2,000 dividend allowance will not be affected.
The changes to NIC and the dividend tax rates are summarised in the table below.
What does it mean?
- An employee earning £50,000 will be £505.40 worse-off per annum.
- For an employer, an employee earning £100,000 will cost an additional £923 per annum.
- A self-employed individual with profits of £70,000 will be £755 worse-off per annum.
What can be done before 6 April 2022?
Businesses can consider accelerating bonuses to before 6 April 2022, to avoid the additional tax charges that will apply from 6 April 2022.
Similarly, company shareholders could bring forward dividends to the current tax year, 2021/22, to manage the effect of the higher dividend tax rates applying from 6 April 2022. It will be important to declare dividends correctly, so that the strict tax point falls within the 2021/22 tax year, as well as ensuring that the company has sufficient distributable reserves.
Companies also need to start thinking about alternative reward options for employees, which are not subject to the HSCL, such as approved share options and equity-based incentives that are assessed to Capital Gains Tax.
For individuals receiving dividend income, they should consider how their investments are structured and the use of ‘tax wrappers’, such as ISAs, pensions, offshore bonds, and personal/family investment companies which can benefit from a dividend exemption (for certain types of dividends). Individuals may also consider certain tax efficient investment under the Enterprise Investment Scheme (EIS) and/or Venture Capital Trusts (VCT), which can offer tax reliefs to mitigate the impact of the higher dividend tax rates. However, it will be important to take specific investment advice when considering EIS/VCT.
Businesses can consider accelerating bonuses to before 6 April 2022, to avoid the additional tax charges that will apply from 6 April 2022.
What do we think?
The estimated £36 billion the HSCL will raise over three years is minor when compared to the £300 billion cost of the pandemic, and £2 trillion of national debt.
In our view, social care was not in mind when this new tax was designed – the main objective was the NHS and to clear the backlog, following the turmoil over the last year. The social care element was an afterthought, which the Government believed would address one of its manifesto pledges, but there is only £5.4 billion allocated to social care over three years.
The Government never wanted to break the ‘triple lock’, and they may try and argue that creating the new levy doesn’t break their promise. This new tax is here to stay and ripe for increase and remit – no Government will eliminate this tax and it will be a valuable tool to turn on the ‘tax tap’ when further tax revenue is needed in the future. There is immediate pressure from the Labour opposition as to why the scope of the levy does not apply to landlords, and it would not be surprising if rental income, pensions and capital gains are brought into the scope in the future.
The HSCL is an effective and immediate solution to support the NHS after the pandemic, but it will become a permanent and useful feature to raise taxes for Governments to come. Whether future increases to the HSCL will actually go into social care is questionable.
Would you like to know more?
If you would like to discuss how the above may apply to you or your business, please get in touch with Lucy or Caroline using the details on this page.