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National Insurance Contributions and Tax on Dividends increasing to raise £36 billion to reform NHS and Social Care

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This week the Prime Minister set out new plans to reform the NHS and the wider Health and Social Care in the UK, looking at providing a less fragmented and cohesive system overall.

Our tax partner Suzy Harris-Milnes takes a look at the context of the government’s new plans and explains more about the increases in national insurance and tax.

Increasing National Insurance and Tax on Dividends
The government has decided to raise revenue through 2 means; a new, UK-wide 1.25 percentage point increase to National Insurance Contributions (NIC) and an increase in the tax individuals will pay on dividends.

This increase will see a temporary rise in NIC from 6 April 2022 for employers, employees and the self-employed, but it’s not going away.

From 6 April 2023, this levy will become segregated from NIC (which will return to their current rates) and will also then apply to individuals working above State Pension age – a further change to the current system.  

This means that from 6 April 2022 – 5 April 2023, the headline NIC rates will change as follows;

  • Employees 12%/2% to 13.25%/3.25%
  • Employers 13.8% to 15.05%
  • Self-employed 9%/2% to 10.25%/3.25%

Class 2 and 3 NIC are not affected.

However, there will be exemptions from the increase for:

  • anyone earning less than the primary thresholds limit of £9,568,
  • small businesses that benefit from the Employment Allowance, which discounts their NIC bills by up to £4,000,
  • employers that receive existing NIC relief to support the employment of apprentices under the age of 25, all people under the age of 21, and veterans (with no more than £50,270 gross earnings) as well as employers in Freeports (with no more than £25,000 gross earnings).

Tax on Dividends
Dividend tax rates are also increasing by 1.25 percentage points to help fund health and social care. This means that anyone receiving dividend income above the current £2,000 tax-free dividend annual allowance will be taxed on dividends at:

  • 8.75% (currently 7.5%) if they are basic rate taxpayers, 
  • 33.75% (currently 32.5%) if they are higher rate taxpayers and
  • 39.35% (currently 38.1%) if they are additional rate taxpayers.

A further increase…one thing that wasn’t mentioned was that, as a result of the changes to the dividend tax rate, the tax rate, known as “Section 455”, will also increase from 32.5% to 33.75%. This is the tax that companies pay on certain loans to Directors and employees.

Although this tax is temporary and is repayable when loans are repaid or written off, companies will have to be aware of the increase and manage cash flow accordingly.

How much will people be expected to pay towards their care costs?
In addition to the increases announced, the government also announced measures to help protect people’s wealth from care costs, which can be a real concern for families.

Going forward, no one in England will have to pay more than £86,000 in care costs over the course of their lifetime regardless of where they live, their age, their condition or their earnings. The state will also cover care costs for anyone with assets under £20,000, and anyone with assets between £20,000 and £100,000 will receive a means-tested mixture of state support and their own contribution to their care. The current system means no help for those needing care until their assets diminish to a level of £23,250, meaning many have to sell their family home to support the costs. Although this is a welcome change, it may not go far enough to ease the worry that some have over funding care costs and losing their family home.

If you would like to find out how these changes will affect you and your business, contact me today!