7th September 2021

The Government announced today an increase in the cost of National Insurance for employers and employees and the self-employed to pay for the costs of the NHS and Social Care.
 
The increases will take effect from 6 April 2022 and will affect employers, employees, the self-employed and those who receive dividends.
 
The full details of the proposals have not been provided and it is possible (perhaps likely) that there will be some important features which will only become clear when the detail is released. In the meantime, we have set out below a summary of the main proposals outlined in the Prime Minister’s speech.
 
What is being proposed?
 
In order to provide additional funds for the NHS and to enable a reform of social care, there will be an increase in national insurance for 2022/23 and the increases will become a new tax (“the Health and Social Care Levy”) from 6 April 2023. Presumably the levy is being introduced as a two stage process so that the existing collection mechanisms for national insurance can be used with effect from 6 April 2022 giving more time to develop the systems for assessment and collection of the new levy. There is also an increase in the income tax rate which is applied to dividends, presumably to ensure an equivalent amount is paid by those people who run companies and choose to receive dividends rather than earnings.
 
What are the proposed changes to social care?
 
Only limited headline information has been provided at the moment:

  • People will no longer pay any more than £86,000 in care costs – that is, for actual care, rather than accommodation – over their lifetime, from October 2023;
  • Those with less than £20,000 in assets will have their care fully paid for;
  • There will be help for people owning between £20,000 and £100,000 in assets; and
  • The amount of help given will be based on a means test, with the details of how this will work to be announced at a later date

What are the changes to national insurance and how much is the new levy?

  • National Insurance (NI) – which working people and their employers pay – will rise by 1.25% from April 2022. This increase will apply to both employee and employer contributions;
  • From April 2023, this extra payment will become a separate tax – called the Health and Social Care Levy – on earned income. It will show up separately on payslips;
  • The levy – unlike NI – will also be paid by people who continue to work beyond retirement age; and
  • Shareholders will also have to pay 1.25% more in tax on the dividends they receive.

Summary of the new rates

Employee (main/higher rate) EmployerSelf Employed (Main/Higher rate)
2021/22 – NIC rates12%/2%13.8%9%/2%
2022/23 – NIC rates13.25%/3.25%15.05%10.25%/3.25%
2023/24 – NIC rates12%/2%13.8%9%/2%
2023/24 – Levy1.25%1.25%1.25%
On all earnings/profits above£9,568£8,840£9,568

Impact on employees and the self-employed

In 2022/23, a typical basic rate taxpayer earning the median basic rate taxpayer’s income of £24,100 would be expected to pay an additional £180 and a typical higher rate taxpayer earning the median higher rate taxpayer’s income of £67,100 would be expected to pay an additional £715.

From 2023/24, whilst the Levy will be a new tax, it will be paid by employed and self-employed individuals and partners earning above the Primary Threshold/Lower Profits Limit (currently £9,568) which apply for national insurance calculations therefore it will produce the same charges as would be the case if the national insurance rates remained at the higher levels.

Impact on employers

Employers will pay the Levy for employees earning above the Secondary Threshold of £8,840 in 2021-22, although existing reliefs will apply for employers of apprentices under the age of 25, all employees under the age of 21, veterans, and new employees in Freeports from April 2022.

Dividends

The rate of tax on dividends has been complicated by various changes over the years and the current proposals will increase the rates to those shown below:

Basic RateHigher RateAdditional Rate
2021/22 dividend rates7.5%32.5%38.1%
2022/23 dividend rates8.75%33.75%39.35%

It is not clear whether the increase in the dividend rates will only apply to individuals or, for example, whether any trusts which receive dividends will also be required to pay the additional rates.

Our initial reaction

The likelihood of changes was well trailed by the government in the last few weeks and goes against the Conservative manifesto pledge not to increase income tax, national insurance or VAT. It is not for us to comment on the politics of the changes and the use of the funds which will be raised however the changes do give a further increase to the already considerable costs to an employer and the typical headline rate will now be 18.55% (15.05% NI plus 3% minimum auto-enrolment pension contributions plus 0.5% apprenticeship levy (for payrolls in excess of £3m)).

The increase will be difficult for many employers to bear and will contribute to price inflation for those who feel able to pass on the cost.

Salary sacrifice arrangements in relation to pension contributions and other government approved benefits will become more attractive, especially since they can give savings in both employer and employee national insurance contributions.

If you have any queries in relation to the above or would like to discuss any employment tax related matters, please do not hesitate to get in touch with one of our specialists:

Lee Muter
Employment Taxes Partner
E: leemuter@unw.co.uk
T: 07810 852 362

Paul Tucker
Employment Taxes Senior Manager
E: paultucker@unw.co.uk
T: 07392 870 199

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