Social care tax of 1.25% hits directors, workers and investors

From April 2022 an increase in taxes on share dividends of 1.25% as well as an increase in the rate of National Insurance Contributions by 1.25% for employers and workers has been announced to help raise money for social care reform.

The tax rise is labelled a Health and Social Care Levy and is meant to raise £12bn a year (£36bn over the next three years).  (HS2 has an estimated final bill of £106bn, without raising taxes.)

The government argues that individuals will pay less in NICs than if they had been asked to pay more income tax, as employers will also share the payment of the 1.25% levy. If the levy was solely funded by income tax, it is argued that this would have resulted in a 2% rise in the basic rate.

Money raised from the levy will initially be used to clear the NHS backlog caused by the pandemic before going on to be used for the long-term reform of social care.

The manifesto-busting controversial plan sees directors who were denied financial help during the pandemic being specifically targeted to pay for the reforms.

Many directors did not qualify for the salary-based furlough scheme as they could not furlough themselves and/or were paid dividends rather than salary, and they were not eligible for the Self-Employed Income Support Scheme either.

To counter the argument that making employers pay more in NICs could constitute a jobs tax, the government says that small businesses will be protected, with 40% not paying any increase.

However, companies are already facing a rise in corporation tax of 6% to 25% from 1 April 2023, so their tax costs are already increasing, and this follows the imposition of the off-payroll working rules (IR35) in April 2021 which has created particular difficulties for personal service companies.

In fact some business owners face a triple-whammy of tax rises as they are personally liable for their own NICs and the dividends tax increase, as well as having the allocate money for the extra corporation tax.

The government has also chosen to increase NICs of lower paid workers when some are already facing cuts in universal credit.

And in the March 2021 Budget it was announced that personal tax thresholds, CGT IHT etc. limits were all to be frozen until 2026, all of which adds to the tax burden on individuals. 

On 31 January 2022, HMRC published new guidance - Prepare for the Health & Social Care Levy.

Working pensioners

From April 2023, working pensioners who do not currently pay NICs will start paying the new levy. From that date there will be a separate “health and social care levy” appearing on payslips.

There will be an additional 1.25% tax on dividends from share holdings.

Why not a wealth tax?

As regards why a wealth tax was not used instead to fund social case, the Prime Minister said:

“Some will ask why we don’t increase income or capital gains tax instead, but income tax isn’t paid by businesses so the whole burden would fall on individuals, roughly doubling the amount that the basic taxpayer could expect to say. Because we are also increasing the dividends tax rate, we will be asking better-off business owners and investors to make a fair contribution too.”

Social care costs

No one will have to pay more than £86,000 for their care (the new cap), with the state picking up the cost beyond this level.

Social care costs will rise depending on the level of a person's assets. Currently, anyone with assets over £23,000 has to use the excess for their social care. This threshold will increase to £100,000, which is more than four times the current limit. However, if a person’s total assets are over £100,000, full fees must be paid.

Details

The Levy will be introduced from April 2022, when NICs for working age employees, self-employed and employers will increase by 1.25%.

From April 2023, the Levy will be formally separated out (ring-fenced) and will also apply to individuals working above State Pension age, and NICs rates will return to their 2021-22 levels. 

We can expect this separate tax to increase in later years as it will not affect income tax or NICs.

According to the government, the levy is based on the principle that every individual should contribute according to their means. Those who earn more pay more. Many small businesses are also protected. 70% of the money raised from businesses will come from the largest 1% of businesses, while 40% of all businesses will pay nothing extra. 

The Levy will apply to Class 1 (Employee, Employer) and Class 4 (Self-Employed, including partners) National Insurance, and to the main and higher rates.

It also applies to Class 1A NICs on Benefits in Kind and Class 1B NICs in respect of PAYE Settlement Agreements. The current 13.8% rate will rise to 15.05% from 6 April 2022.

From April 2023 onwards the Levy will also apply to those above State Pension age who are still in employment.

The increase will not apply to Class 2 or Class 3 NICs.

Existing NICs reliefs to support employers will apply to the Levy. Companies employing apprentices under the age of 25, all people under the age of 21, veterans and employers in Freeports will not pay the Levy for these employees as long as their yearly gross earnings are less than £50,270, or £25,000 for new Freeport employees.

For individuals, the Levy will be progressive.

6.2 million people earning less than the Primary Threshold/Lower Profits Limit of £9,568 in 2021-22 will not pay the Levy.

A typical basic rate taxpayer earning £24,100 will contribute £180 in 2022-23, while a typical higher rate taxpayer earning £67,100 will contribute £715.

Additional rate taxpayers make up just 2% of individuals affected but will contribute nearly 20% of the revenue raised from individuals. The highest earning 14% will pay around half the revenues.

Those earning between £100,000 and £130,000 and have their personal allowance withdrawn will pay a marginal income tax rate of 63.25% (40% income tax, 2% NIC, 1.25% levy, and withdrawal of the 20% personal allowance).

The Employment Allowance, which discounts the smallest businesses’ employer NICs bills by up to £4,000, will also apply to the Levy. This means that around 40% of businesses, around 640,000, will not be affected at all by the Levy. The next 40% of businesses, around 665,000, will face an average increase of £450 per year.

70% of the money raised from businesses will come from the largest one per cent of businesses – those with at least 250 employees.

However, whilst the employment allowance can be set against the increased secondary class 1 NIC for 2022/23, it is not yet clear whether the allowance will still be available to be set against the Health & Social Care Levy from April 2023.

Umbrella companies

Agency workers or contractors that work through umbrella companies will be particularly worse off under the tax rise as they will be paying both the employers and the employees NICs, i.e.2.5%.

Increasing dividend tax rates

From April 2022 dividend tax rates will increase by 1.25%, as dividends are not subject to NICs. All taxpayers can still receive up to £2,000 in dividends before they are liable for any tax

For tax year 2022/23, dividend tax rates will remain lower than their related income tax rates:

• 8.75% at the basic rate (up from 7.5%)
• 33.75% at the higher rate (up from 32.5%)
• 39.35% at the additional rate (up from 38.1%)

Subject to commercial and other considerations, director shareholders may wish to consider taking a dividend before April 2022 to avoid the tax increase.

The 1.25% extra will also apply to overdrawn directors' loans from April 2022 from the current rate of 32.5% to 33.75%.

Some investors will be unaffected. Shares held in ISAs are not subject to dividend tax and, due to the £2,000 tax-free dividend allowance and the personal allowance, around 60% of individuals with dividend income outside of ISAs are not expected to pay any dividend tax or be affected by this change in 2022-23.

References

• Health & Social Care Levy policy paper


• Health & Social Care Levy Bill

Further information

If you have any questions regarding any of the above, please contact your normal Bishop Fleming contact or a member of the Employer Solutions team. 

For more information on employer issues check out our Employer Solutions Knowledge Hub.