Tax changes announced to fund the NHS and social care reforms

Boris Johnson announced on 8 September 2021 that a health and social care levy will be introduced to help with the funding of the NHS and pay for care sector reforms. There will also be an increase in the tax rates used to tax dividends.

The Government states that the tax increases will generate an additional £12 billion a year for health and social care for the next 3 years. Over this period, they have earmarked £5.4 billion specifically for social care and a further £8.9 billion for a “health-based COVID-19 response”.

Health and social care tax

The new health and social care tax will take effect from April 2022, and will start with a 1.25% increase in National Insurance contributions. This increase will apply to both the employer’s and employee’s class 1 National Insurance, and for self-employed individuals.

From April 2023, this will then become a separate tax on earned income. It will still be calculated in the same way as National Insurance contributions but will appear separately on an employee's payslip.

According to the GOV.UK website, an individual earning £50,000 will see their National Insurance contributions rise from £4,851 to £5,356 each tax year, a £505 tax increase. This would then increase to a rise of £1,130 based on a salary of £100,000.

Working pensioners

Under the current National Insurance rules, taxpayers stop making National Insurance contributions when they reach the age that they qualify for state pension. This age is currently 66.

Under the new changes, working pensioners will start to pay the new National Insurance levy from April 2023, with contributions starting at 1.25%. This is the first time that any government has asked pensioners to pay a tax of this kind.

Dividend tax increase

In addition to the health and social care levy, the tax rates for dividends will also increase by 1.25% from April 2022.

This 1.25% increase will affect all income tax bands and the revised dividend rates will be as follows:

This increase in tax will affect many business owners who take a large proportion of their income as dividends. It’s important to note that even despite this increase in the tax rate, dividends will still be more tax efficient than taking other employment income. This is due to the dividends rates remaining lower than the employment rates which are 20%, 40% and 45%.

The dividend tax allowance of £2,000 will remain, but where you have significant levels of dividends, it may be sensible to consider the timing of these. For example, bringing forward dividends into the 2021/22 tax year to take advantage of the rates before the increase.

Increasing dividends would mean a higher tax liability for 2021/22 and in turn an increase in your payments on account for the following year. We can assist you with considering whether a reduction in your payments on account is appropriate and assess the benefit of bringing forward dividend payments.  

For further information, please read the Government’s health and social care levy here. If you’d like to talk to us, you can find contact details on the Our People section of the Larking Gowen website. Alternatively, call 0330 024 0888 or email enquiry@larking-gowen.co.uk.

James Caley