Tax increases for Social Care Levy

A new social care levy is to be introduced by the government from April 2022 to fund social care and help the NHS recover from the pandemic. The new levy is expected to raise revenue of £12bn a year.

This measure will temporarily increase National Insurance contributions for employees, employers and the self employed by 1.25% for the 2022/23 tax year with the revenue raised going directly to support the NHS.  From April 2023 onwards National Insurance contributions will return to their 2021/22 levels and the new tax will then become a separate 1.25% Health and Social Care Levy, with the revenue ringfenced for health and social care.

Individuals over State Pension age who are still working do not pay National Insurance contributions and will not therefore be affected by the temporary increase in 2022/23. However, they will be liable to pay the levy from April 2023.

The higher an individual’s earnings, the more they will pay. In 2022/23 an individual earning £25,000 will pay an additional £193. An individual earning £50,000 will pay an additional £505.

Dividend tax rates will also be increased by 1.25%. Currently the first £2,000 of dividends received are tax free. Dividends are then taxed at rates of 7.5%, 32.5% or 38.1% depending on which tax band applies to the income. Following the increase, the rates will become 8.75%, 33.75% and 39.35% from April 2022.

These changes will affect employees, employers and the self- employed but will have a greater impact on the tax cost of employment which already exceeds that of self- employment. This is only likely to increase the issues surrounding the classification of workers as employees or self- employed.

It is also curious that although the levy is extended from employment and business income to dividends, other type of income such as property letting and pensions are unaffected. It appears in some respects that the earnings and business income of working age people are being more heavily taxed to protect the wealth and property of older people.

During the first year when National Insurance is being used to raise the levy HMRC will update their systems to collect the new Health and Social Care Levy from April 2023 in effect as a separate tax. It will be interesting to see how this develops and whether future governments will be able to resist increasing the rate if further funding is required.

If you have any questions, please do not hesitate to speak to your usual Dodd & Co contact.