Health and social care levy: What we know

Source Accounting Web

To help raise an extra £12bn a year for health and social care following the pandemic, all rates of national insurance contributions and income tax on dividends will increase by 1.25 percentage points from 6 April 2022.

This increase in rates will be rebranded as the “health and social care levy” from April 2023 and de-coupled from its NIC parent at that time, allowing the government to widen its scope to include working taxpayers who are over state pension age.

The technical annex to the proposal for the health and social care levy says the NIC rates will revert to their previous levels from April 2023, but the monetary effect for each taxpayer will be the same. Only the names of the taxes are changed.  

Older workers

Self-employed individuals who are over the state pension age on 6 April 2023, will pay the health and social care tax at 1.25% on profits over £9,568 per year. 

Employees currently don’t pay primary class 1 NIC when they reach state pension age, but employers do pay secondary class 1 NIC on the salary of these older workers, unless they fall under one of the exemptions for secondary class 1 such as for ex-forces veterans.

Any employees over state pension age will have to pay the health and social care tax at 1.25% on all of their earnings above £9,568 per year from 6 April 2023. 

Class 1 NIC

Class 1 Primary (employee) 2021/22 2022/23
0 – £9,568 0% 0%
£9,568 – £50,270 12% 13.25%
Above £50,270 2% 3.25%
Class 1 secondary (employer)    
0 – £8,840 0% 0%
Above £8,840 13.8% 15.05%
Class 1A 13.8% 15.05%
Class 1B 13.8% 15.05%

The upper earning limit of £50,570 is aligned with the income tax higher rate threshold, both of which will be frozen at that level until 6 April 2026, as announced in the Budget on 3 March 2021.

We don’t know whether the primary threshold (£9,568) and the secondary threshold (£8,840) will also be held at those levels for that period.

A person on the minimum wage of £8.91 per hour starts to pay class 1 NIC if they work more than 17.4 hours per week and pays income tax if they work more than 21.13 hours per week.  

Class 4 NIC

  2020/21 2022/23
0 – £9,568 0% 0%
£9,568 – £50,270 9% 10.25%
Above £50,270 2% 3.25%

Classes 2 and 3 NIC

These classes of NIC are charged at flat monetary amounts per week, and the government has confirmed that the increase in NIC which will be transformed into the health and social care tax, will not apply to these classes of NIC. Thus, the care tax will not apply to those taxpayers who are only paying class 2 or class 3 NIC. 

Example 1

George is a partner in the Gershwin Law partnership, taking a profit share of £150,000 per year. The class 4 NIC payable on George’s income from the partnership will be:  

2021/22 Rate Payable
Class 4 NIC    
£9,568–£50,270 9% £3,663.18
£50,270–£150,000 2% £1,994.60
Total class 4 NIC   £5,657.78
Class 4 NIC Rate Payable
£9,568–£50,270 10.25% £4,171.96
£50,270–£150,000 3.25% 3,241.23
Total class 4   £7,415.19

The class 4 NIC due on George’s profit share has increased by £1,755.41 in 2022/23. That’s an increase of nearly 31%.

The 2022/23 tax year is also the transition period between the current year basis and the proposed tax year basis due to apply from 6 April 2023. The 33% of partnerships that do not already draw up accounts to 31 March or 5 April will have more than 12 months of profits taxed in 2022/23, leading to bumper tax and class 4 NIC bills in that year.

Dividend tax

The rates of income tax on dividends received will increase as shown in the dividend tax table below. Dividends received on investments held within ISAs are not subject to the dividend tax.

Dividend tax   2021/22 2022/23
Basic rate 7.5% 8.75%
Dividend allowance £2,000 £2,000
Higher rate band 32.5% 33.75%
Dividend allowance £2,000 £2,000
Additional rate band 38.1% 39.35%
Dividend allowance £2,000 £2,000

We don’t know whether the dividend allowance will remain at the same level or be cut in 2022/23.

Example 2

Fred is the director and sole shareholder of Flintstone Ltd, and is the only employee. He takes a salary of £12,570, and dividends of £37,700. Any remaining profits are either left in the company or paid as an employer’s contribution into his pension fund.

The income tax and NIC payable on Fred’s income from the company will be:

2021/22 Rate Payable
Class 1 NIC–employee    
£9,568–£12,570 12% £360.24
Class 1 NIC – employer     
£8,840–£12,570 13.8% £514.74
Dividend tax    
£2,000–37,700 7.5% £2,677.50
Total tax and NIC   £3,552.48
2022/23 Rate Payable
Class 1 NIC–employee    
£9,568–£12,570 13.25% £397.76
Class 1 NIC – employer     
£8,840–£12,570 15.05% £561.37
Dividend tax    
£2,000–37,700 8.75% £3,123.75
Total tax and NIC   £4,082.88

The income tax and class 1 NIC due on Fred’s income has increased by £530.40 in 2022/23. That’s an increase of nearly 15%, which Fred will surely notice.

The employer’s class 1 is tax deductible for Flintstone Ltd, but Fred also needs to budget for an increase in corporation tax from 1 April 2023, when the main rate jumps from 19% to 25% of profits over £50,000, subject to tapering up to £250,000.

Possible knock-on effect for loans

Where a director/participator in a close company borrows from that company (eg overdrawn director’s account) and doesn’t repay the loan by the due date of the corporation tax, a section 455 charge is levied at 32.5% of the outstanding loan.

That section 455 charge may also be increased to 33.75% in line with the higher rate of dividend tax from 6 April 2022, but this has not been confirmed. 

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