Service: Taxation 

The new Health and Social care tax and how it will impact you

By Amal Shah

08 Sep 2021

On 7th September Boris Johnson announced that NI and dividend tax rates will be hiked to help fund social care, pay for coronavirus support measures and clear the NHS backlog. 

As part of the new initiative, NI rates will increase by 1.25% from April 2022 for both employee and employer contributions as well as for self-employed individuals. 

The following table illustrates what this will mean for employees, assuming the current NI brackets apply:

Salary Current NI bill Expected increased NI bill Change
£15,000.00 £651.84 £719.74 £67.90
£25,000.00 £1,851.84 £2,044.74 £192.90
£35,000.00 £3,051.84 £3,369.74 £317.90
£45,000.00 £4,251.84 £4,694.74 £442.90
£55,000.00 £4,951.84 £5,519.74 £567.90

Source: Newsflash

Also, the dividend tax rates will increase by 1.25%, i.e. to 8.75%, 33.75%, and 39.35% for basic, higher, and additional rate taxpayers respectively.

This will begin as a 1.25% increase in National Insurance Contributions (NICs) and tax on share dividends from April 2022. It will then become a separate tax on earned income from April 2023.

For entrepreneurs and business owners, this means a triple hit from next April. They will be paying the 1.25% NIC increase on their own salary; the employer contribution is increased; they will also pay an additional 1.25% on dividends extracted from profits of the business.

For pensioners: in 2022/23 the levy will be an increase in NIC, plus an increase in the dividend tax rates, meaning that pensioners will pay it on dividends but not on earnings. Pensioners in work will also have to pay the new levy - despite people being exempt from NI payments after reaching state pension age when the NIC element changes to a free-standing Health and Social Care Levy for 2023/24, pensioners will pay it.

Whilst the 1.25% NIC increase was somewhat expected given recent press coverage, the additional tax on dividend income is a surprise and together should raise an additional £12bn a year to fund NHS and social care spending. 

The prime minister also promised a cap on the cost paid by any one person for social care in their lifetime, which will be set at £86,000 for people entering care from October 2023.

There will be a floor of £100,000 in assets. This means the government will step in to pay an individual’s social care bill beyond this cap.

If you require further information on how this update will impact you and your business, contact our tax team today at tax@geraldedelman.com.

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