Health and Social Care Levy and dividend tax rate increase

4 Nov 2021

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On 8 September, the government announced the introduction of a new 1.25% Health and Social Care Levy, to help fund the increase in expenditure arising from the pandemic.

The new UK-wide levy will initially be based on National Insurance contributions (NICs) and the revenue raised will be ringfenced to fund the investment into health and social care. The introduction of the levy brings the UK in-line with some of the other countries within the G8.

Working age employees, the self-employed and employers will be subject to this increase from April 2022 via an increase to their NICs and the funds raised will be added to the existing NHS allocation. The levy will be applied to both employee and employer Class 1 NICs, as well as Class 4 NICs. It is worth noting however, that the levy will not apply to Class 2 or 3 NICs, to protect the lowest paid self-employed workers and those making voluntary contributions.

From April 2023, the levy will be formally separated into a standalone item on the payslip and NIC rates will return to the 2021-22 levels. A consequence of this separation means that individuals in employment past the state pension age will be subject to the levy too.

Workers who are seconded to the UK from other countries are often not subject to NIC as a result of international agreements. The levy will be subject to the same treatment for the 2022-23 tax year, the government will need to consider whether the exemption will still apply once the levy becomes its own item.

The government has described the levy as a tax and it may therefore be treated in the same way as income tax for the purposes of double tax agreements. However, this is not certain and we await further clarity from the government.

In addition to the levy, a 1.25% increase to dividend tax rates from April 2022 was also announced. The £2,000 dividend allowance will remain as before. The increased dividend tax rates that apply from April 2022 are:

  • Basic rate taxpayers will pay a tax rate of 8.75%.
  • Higher rate taxpayers will pay a tax rate of 33.75%.
  • Additional rate taxpayers will pay a tax rate of 39.35%.

The government’s intention is to incorporate those who would not ordinarily be subject to NIC to contribute to the health and social care fund. As with the levy, the revenue raised from the 1.25% uplift will be ringfenced to fund health and social care.

It is estimated that between the levy and the increased dividend tax rates, an additional £12 billion per year will be raised and made available for health and social care across the UK. According to the published figures, an average basic rate taxpayer is estimated to pay a further £180 per year, whereas the average higher rate taxpayer is estimated to pay a further £715. The highest earning 14% will contribute to approximately half of the total revenue, of which additional rate taxpayers would contribute 20% of the total.

£10 billion will be retained for England, with the remainder being shared between Scotland, Wales and Northern Ireland. Of the amounts for England, approximately £6 billion will be allocated to the NHS.

Notable exceptions to the levy are:

  • Landlords, who are not liable to pay NIC on the profits arising from their rental properties, only income tax.
  • Taxpayers receiving investment income.
  • Capital gains tax and inheritance tax, despite previous anticipation of changes to both taxes.

The main criticism of the levy is that it goes against the Conservative manifesto to not increase VAT, income tax and National Insurance. Two of these have been increased by the levy.

The Autumn Budget will take place on 27 October 2021 and whilst it is expected to be a Budget which focuses on technical points, rather than revise tax rates, the introduction of the levy may open the door for further tax increases.

Should you wish to discuss what the Health and Social Care Levy might mean for you, please speak to your usual Saffery Champness contact.

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