The Prime Minister recently announced rises in National Insurance, in the form of a new Health and Social Care Levy, and dividend tax rates. The COVID pandemic has hit the economy hard and as we see the after-effects, these may be the first of many tax rises to come over the next few years.
What is the new Health and Social Care Levy?
The Health and Social Care Levy will come into effect from April 2022 and be an additional charge of National Insurance for employees and employers, paid directly to the National Health Service and social care. Once HM Revenue & Customs have their systems in place to manage this, this will change to a new and separate ‘levy’, with NI rates reverting to current levels.
What increase will arise with the Levy and who will pay it?
The increase is 1.25% and will apply to Class 1, Class 1A, Class 1B and Class 4 National Insurance contributions. However, it wasn’t originally made clear that the levy will also affect employers, meaning their contribution rate of 13.80% will increase to 15.05%.
This increase will only apply to earnings over the current NI thresholds, so for example anyone earning below £9,568 still won’t be paying any National Insurance contributions.
In addition to employees, the levy will apply to all workers whether self-employed or employed, and also anyone over state pension age who is still working.
What will be the effect on me?
This levy will affect everyone who works and earns over the threshold.
From April 2022 the 1.25% will be added to your National Insurance contributions. This will change, likely from April 2023, and be treated as a new levy and should show as a separate entry on your payslips or tax returns.
This news has worried a lot of employers of all sizes, but particularly small employers. I hasten to use the words ‘the good news is’, but a lot of ‘small’ employers don’t actually pay employers National Insurance because they claim the Employment Allowance. This is a £4,000 annual allowance that eligible employers can offset against their National Insurance contributions. Therefore, for the employers who claim this, and have some levy spare, they likely won’t physically pay the additional 1.25% levy.
And what about the dividend tax increase and what impact will this have?
There will be an increase in all dividend tax rates of, again, 1.25% from April 2022. All individuals currently have an entitlement to a £2,000 dividend allowance so the change will only impact those who have dividend income in excess of this during the tax year.
The impacts are more likely to be felt by those with high value investments or owners of small companies who draw regular dividends which make up a significant part of their income. Such business owners may consider the possibility of bringing forward dividend payments to the current tax year before the new rates kick in.
The rate will increase from 7.5% to 8.75% for a basic rate taxpayer. The higher and additional rates will rise to 33.75% and 39.35% respectively.
Questions and support
If you have any questions or concerns about how the new levy or increased dividend rates will impact you as an individual or business owner, please do not hesitate to get in touch to talk through some worked examples to ensure you are prepared for April 2022.