Boris Johnson unveiled plans on 7 September for tax increases that aim to specifically address underfunding in the NHS and social care systems.
The new Health and Social Care Levy Bill is currently at committee stage in the House of Commons and is set to be fast tracked to ensure that the relevant changes are brought in for the start date of 6 April 2022.
The dividend tax increase will be dealt with under separate legislation but will also come into force on 6 April 2022.
The funds raised from these measures will be ring-fenced with the Treasury having discretion over the allocation of funds between NHS and social care, and the allocation between nations.
There will be a 1.25% increase in rates of National Insurance – main and additional rates of class 1, class 1A and class 1B (due on employment income) and class 4 (due on self employed income). To ensure that all taxpayers, regardless of their business structure, are equally affected by this levy the same increase is also being applied to dividend tax rates. It is as yet unclear whether this higher dividend rate will apply to trusts and executries.
In the 2022/23 tax year those taxpayers who are of state pension age but are still working will not be liable for this additional levy, however from 6 April 2023 they will become liable.
No contributory benefits will arise from paying this particular tax, which in its first year will be dealt with as National Insurance, but thereafter will be treated as a new stand alone Levy.
The changes are expected to raise £36bn and assist the government in applying a lifetime cap on social care costs.
To illustrate the effect we could look at three people, one who earns £50,000 through employment alone, one who earns £50,000 through self employment and one who earns £50,000 through a limited company, made up of a salary set at the national insurance threshold, and dividends up to the limit of the basic rate band. The employed taxpayer and the self employed tax payer are both worse off next year by £505.40 (representing 1.01% of their gross income), while the person operating through a limited company is worse off by £442.87 (representing 0.88% of their gross income).
The theory is that the majority of the money raised will come from higher rate taxpayers. If we look at the position for an employee or a self employed individual who earns £260,000, they will be paying £3,130.39 more next year than in the current year (representing 1.2% of their gross income).
If you would like us to assess the impact this will have on you financially please don’t hesitate to get in touch with our tax department.