The Prime Minister has announced an increase in both national insurance contributions (NIC) and dividend tax rates from next April to help fund the Government’s health and social care reform.
Boris Johnson has had to break his manifesto pledge of not increasing income tax, national insurance or VAT rates during his parliamentary term to bring in this change. His justification for doing so, however, is that they could never have predicted the global pandemic when making this pledge. Further, he could also argue that the NIC increase is only a temporary measure, as it will be classified as a new tax from April 2023.
The key announcements
From April 2022, NIC rates are to rise by 1.25%. This will be for both class 1 employer’s NIC and class 1 employee’s NIC so effectively a 2.5% increase in total. The rise will also apply to class 4 NIC for the self-employed (but not class 2 or class 3 NIC). The increase will be applied to the main and higher rates.
From April 2023, the NIC rates will reduce back to current levels and a new tax, known as the ‘Health and Social Care Levy’, will instead apply at a rate of 1.25% of earned income. This will be shown as a separate entry on an employee’s payslip. From this date, the new levy will also apply to individuals working above state pension age.
Dividend income tax rates are also rising by 1.25% from April 2022, with new rates as follows:
- Basic rate: 8.75% (up from 7.5%)
- Higher rate: 33.75% (up from 32.5%)
- Additional rate: 39.35% (up from 38.1%)
When the dividend rates increased last time, the s455 tax on directors’ loans also increased in line with the higher rate band, to 32.5%. Although there is nothing specific in the detail published by the Government referencing this, it would be of no great surprise if it is also increased to 33.75%, at the upcoming Autumn Budget on 27 October 2021.
Social care plan
The Government estimates that the new measures will raise £12 billion per year. The additional tax raised, it is said, will be ringfenced to help pay for the impact on the NHS of the COVID-19 pandemic, as well as fund the Government’s social care plan which, with effect from October 2023, will include the following:
- Anyone starting care in England will be subject to a lifetime cap spend of £86,000 on social care. However, the cap only applies to ‘physical care’ and not to daily living costs, such as food, energy bills and the accommodation. Furthermore, it is probable that only the frailest of individuals will qualify.
- Anyone with assets of less than £20,000 may need to make a contribution from their income but will not have to pay anything for their care costs from their assets.
- Those with assets of less than £100,000 will have subsidised care costs under means-tested support. Individuals will still be required to pay for their care costs from their income but, if that is insufficient, will also be required to contribute up to 20% of the total value of their assets per year.
With the change effective from April 2022, it may be worthwhile to plan ahead now and look at whether dividends and/or bonuses can be paid prior to the end of the tax year, before the rate increases take effect.