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UPDATE: National Insurance Tax Rise- Individuals

What individuals need to know.

The Prime Minister has announced that from April 2022 there will be a ‘Health and Social Care Levy’ (HSC Levy) of 1.25 percent based on National Insurance Contributions and a matching 1.25 percent increase in the rates of dividend tax. On the same day, the Chancellor confirmed that the Autumn Budget will be held on Wednesday 27 October 2021. With the Government’s continuing need to raise funds to finance the cost of the pandemic, individuals may be thinking about further future tax increases and potential changes to capital taxes.




Funding Health and Social Care On 7 September 2021 the Government published ‘Build Back Better. Our plan for health and social care’ which will result in a permanent increase in Government spending. The Prime Minister confirmed that this plan is to be funded by raising taxes in the form of:

  • A HSC Levy, a new 1.25 percent tax charge on earned income which will apply to employers, employees and the self-employed (including partners); together with

  • A 1.25 percent increase to the rates of dividend tax which will apply to individuals who receive dividend income from shares and will impact business owners and investors.

Overall, the Government estimates that these tax increases will raise a substantial £12 billion per year across the UK. These funds are to be ringfenced to pay for the Build Back Better health and social care plan.

Health and Social Care Levy The new HSC Levy will initially be funded through increases in National Insurance rates. From April 2022 the Government will introduce a temporary increase of 1.25 percent to National Insurance Contributions (NIC) for employers, employees and the self-employed including partners. The table below assumes the NIC thresholds/profit levels remain at their current levels in 2022/23. This increase will not impact those earning below the NIC Primary/Lower Profits Limit threshold of £9,568.

Employers

Class 1 NIC

Class 1 NIC

Employees

Class 1 NIC

Self-employed

Class 4 NIC

Current year

2021/22

13.8%

12% (between £9,568 and £50,270 the NIC Upper Earnings Limit) and 2% (above that limit)

9% on profits between £9,568 and £50,270 and 2% payable on profits above £50,270

2022/23

15.05%

13.25% (between £9,568 and £50,270 NIC Upper Earnings Limit) and 3.25% (above that limit)

10.25% on profits between £9,568 and £50,270 and 3.25% payable on profits above £50,270

From April 2023:

  • The 1.25 percent HSC Levy will be formally separated from NIC and will also apply to working individuals above state pension age and

  • NIC will return to the 2021-22 rates.

Our current understanding is that the HSC Levy will:

  • Apply to the same earnings as Class 1 NIC (employers and employees) and Class 4 NIC (self-employed including partners)

  • Be collected via the PAYE system through payroll and

  • Benefit from existing NIC reliefs (e.g. for employees under the age of 21, apprentices under 25, qualifying freeport employees, and the employment allowance).

Dividend rates

From April 2022 rates of dividend tax increase by 1.25 percent.

Dividend rates are based on the level of taxable income and this increase is as follows.

Level of taxable income

Basic rate

Higher rate

Additional rate

Current year 2021/22

7.5%

32.5%

38.1%

Future Years from 2022/23

8.75%

33.75%

39.35%

Companies will be affected by the increased dividend tax rate, additional 1.25 percent employers’ HSC Levy as well as the increase to corporation tax to 25 percent from April 2023. The impact of these increases on the effective rate of tax i.e. taking account of corporation tax already suffered on taxable profits (but not adjusted for any potential costs of the HSC Levy) is set out in the table below. Privately owned business owners will need to carefully think through and work out the impact of these changes, especially those that typically take dividends as well as salary.



Basic rate

Higher rate

Additional rate

Current year 2021/22 (19% corporation tax rate)

25.1%

45.3%

49.9%

2022/23 ( 19% corporation tax rate)

26.1%

46.3%

50.9%

2023/24 onwards (25% corporation tax rate, subject to reduced rates down to 19% for small profits)

31.6%

50.3%

54.5%

The impact of the new levy for employers is covered in a separate article.




Crotty, J., 2021. Funding Health & Social Care plus Budget date. [online] KPMG. Available at: <https://home.kpmg/uk/en/home/insights/2021/09/tmd-funding-health-and-social-care-plus-budget-date-impact-for-individuals.html> (Accessed 24 September 2021).






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