A new 1.25% health and social care tax is being introduced on earned income and dividends from shares to help the NHS recover from the Covid-19 pandemic and improve social care in England.
Introduction
On 7 September 2021, Boris Johnson announced that National Insurance and dividend tax rates will increase to help fund social care, pay for coronavirus support measures and clear the NHS backlog.
She said that the levy would fix the long term problems of health and social care that have been 'cruelly exposed by Covid'. The announcement does break the government’s manifesto pledge to freeze the rates of National Insurance. However, the significant effects of Covid-19 were not foreseen in the manifesto pledge.
The levy should mean that people in need of long term care should not pay more than £86,000 over their lifetime, excluding the cost of their accommodation. Furthermore, those with assets of up to £20,000 should not pay for their care costs.
The 1.25% levy is expected to last for three years and help to raise £12bn per year, £36bn over the three year period, for health and social care.
Boris Johnson said that no one earning less than £9,568 [in 2021-22] will pay more. That links with the National Insurance bands for employees and the self-employed. However, as dividends over £2,000 are subject to dividend tax, this is completely true. Those will dividend income, and especially small owner managed limited companies, will certainly pay more.
Employees and the self-employed will pay more ‘tax’ from April 2022.
For a shorter summary please read our blog article on the Health and Social Care: National Insurance contribution increase by 1.25%.
Employees
Currently, in 2021-22, employees pay 12% National Insurance on salaries between £9,564 and £50,270. However, only 2% is paid in National Insurance above this threshold.
This makes National Insurance different from income tax, which increases from 20% to 40% once earnings exceed £50,270.
From April 2022, National Insurance rates will increase by 1.25%.
For 2022-23, the earnings bands will be £9,880/£12,570 (changes on 5 July 2022) to £50,270. This means that the limit will increase to £11,908 (3/12 of £9,880 plus 9/12 of £12,570) for 2022/23 and then be aligned with the personal allowance of £12,570 from 6 April 2023.
From April 2023, National Insurance rates will return to their current rates. However, a new Health and Social Care Levy will instead be introduced at a rate of 1.25%, to cover the reduction in National Insurance back to 2021-22 rates.
From April 2023, wages payslips will show a separate line for the new ‘Health and Social Care Levy’. A similar new line is expected to be shown on the Self Assessment tax calculation to collect the levy from the self-employed.
The National Insurance increase will only apply for the 2022-23 tax year. It will then be replaced by the new levy for the tax year 2023-24 onwards.
The increase in National Insurance will be paid by both employers and employees, therefore collecting an extra 2.5% on earnings over £9,564.
Individuals who earn under £9,564 [in 2021-22] don't pay National Insurance and will not pay the new levy. The limit increases to £9,880 between 6 April 2022 and 5 July 2022 and then increases further to £12,570 from 6 July 2022.
Employers will also pay another 1.25% in National Insurance, increasing their rate from 13.8% to 15.05%.
Most smaller employers will not bear the extra National Insurance as any employer's National Insurance up to £4,000 in 2021-22 can be recovered through the Employment Allowance each tax year. The allowance increases to £5,000 from 6 April 2022.
For 2022-23, the extra 1.25% will be paid extra National Insurance. However, from 2023-24, National Insurance rates will revert to previous levels. Instead, the extra 1.25% will be collected through the new levy. Some wondered whether this later increase may not be included in the Employment Allowance. However, the announcement goes on to says "the Employment Allowance, which discounts the smallest businesses’ employer NICs bills by up to £4,000, will also apply to the Levy."
In addition, no National Insurance is payable by businesses employing people under the age of 21 and apprentices up to the age of 25.
Individuals earning £20,000 pa will pay an extra £130, whilst an individual earning £50,270 pa will pay an extra £505.
To show what this will mean for employees, the table below should be helpful.
Salary | Current NI | Expected NI | Extra NI |
£15,000 | £652 | £720 | £68 |
£25,000 | £1,852 | £2,045 | £193 |
£35,000 | £3,052 | £3,370 | £318 |
£45,000 | £4,252 | £4,695 | £443 |
£55,000 | £4,952 | £5,520 | £568 |
Employees and employers pay Class 1 National Insurance and the rates above [for 2021-22] relate to this Class of National Insurance.
The increases also affect:
Class 1A National Insurance on benefits in Kind.
Class 1B National Insurance on PAYE Settlement Agreements.
Section 455 tax that applies to overdrawn directors loan accounts, that are not cleared within 9 months of a limited company‘s year-end (section 455 Corporation Tax Act 2010). The employer’s rate of National Insurance is directly linked to the dividend upper rate. This will mean that section 455 tax will also increase from April 2022, from 32.5% to 33.75%
Director-shareholders
Director-shareholders of their own limited company, who probably do not currently pay any National Insurance in practice, as their salary is kept below the National Insurance limits, could also be affected. They will not however start to pay National Insurance, or pay the extra 1.25%, unless their salary exceeds the National Insurance Primary Threshold, which is currently £9,568 pa for 2021-22. The rates for 2022-23 and 2023-24 are £9,880 / £12,570 (changes on 6 July 2022).
Rather than paying more National Insurance, director-shareholders will pay an extra 1.25% on the dividends [over £2,000] that they withdraw from their companies, in lieu of their low salaries.
The rate of dividend tax will also increase by 1.25% i.e. to 8.75% (from 7.5%), 33.75% (from 32.5%) and 39.35% (from 38.1%) for basic, higher and additional rate taxpayers respectively.
It can be argued that the extra 1.25% tax on dividends from shares is unfair as the very same director-shareholders who were not eligible for help during the pandemic based on lost profits and resultant dividends not counting as lost earnings under the furlough scheme.
Business owners should therefore considering maximising their company dividends before 5 April 2022 and may wish to deferred higher dividends for three years, when the new levy is due to end.
A basic-rate taxpayer receiving £3,000 of dividends will pay dividend tax on £1,000 meaning that their tax bill will increase from £75 to £87.50.
Similarly, a higher-rate taxpayer receiving £10,000 of dividends will pay 33.75% on £8,000 of dividends. This will result in a dividend tax of £2,700, an increase of £100 compared to the current rules.
Working pensioners
Currently, National Insurance is not paid by employees over state pension age on salary or self employment profits. People stop making National Insurance when they reach state retirement age. This rule will remain unchanged.
Whilst there is no employee's National Insurance for those over state retirement age, employers employing pensioners still pay employer's National Insurance. This is currently at the rate of 13.8% on salary over the Secondary Threshold, of £8,840 pa for 2021-22 and £9,100 for 2022-23. The rate will increase to 15.05% of salary over the threshold.
National Insurance has never been paid, and will continue not to be paid, on private and state pension income. This will also be the case with the levy. Only income tax is payable on pension income. This will remain the case.
However, from 6 April 2023, the 1.25% levy will apply to employers and employees, including those over state pension age. This may affect around 1 million working pensioners, but only from April 2023. Employers will start to pay 15.05% National Insurance / Levy, on their employees' salaries, over the Secondary Threshold, including for pensioners. However, pensioner employees will only pay the 1.25% levy.
To be clear, pensioners will continue not to pay any National Insurance, but will pay the new levy, on earnings over the Primary Threshold, from 6 April 2023.
Self employed
The self-employed pay Class 2 and Class 4 National Insurance, subject to profit levels.
Class 4
Self-employed individuals (not through limited companies) in 2021-22 currently pay 9% Class 4 National Insurance on profits over £9,568 (-) and up to £50,270, with an extra 2% on profits over £50,270. These rates will increase to 10.25% and 3.25% respectively in 2022-23. The 1.25% increase will then be collected through the Health and Social Care Levy in 2023-24 and 2024-25, with the Class 4 rates returning to 9% and 2% from 2023-24.
(-) Increases to £9,880 on 5 April 2022 and then to £12,570 on 6 July 2022 i.e. threshold of £11,908 for 2022-23.
Class 2
Class 2 National Insurance, in 2021-22 and 2022-23, is paid at £3.05 pw, £158.60 pa, if profits are over £6,515 pa (+).
Whilst Class 2 National Insurance is quoted at a weekly rate, it is paid annually, along with any Class 4 National Insurance, through the Self Assessment tax system. There are no plans to increase Class 2 National Insurance under the proposals.
(+) Increases to £6,725 on 5 April 2022, but no Class 2 National insurance is due unless profits exceed £11,908 in 2022-23 and £12,570 pa in 2023-24.
Class 2 National Insurance is only payable if profits for the year exceed the new small profits threshold of £6,725 . This low threshold allows the self-employed with small profits to generate 1 of their 35 years of contributions towards their state pension and other state benefits.
From 2022/23, the threshold for paying Class 2 National Insurance will increase to £11,908 and then £12,570 for 2023/24. The large increase in the threshold could see many low-profit self-employed individuals with no National Insurance contributions unless their profit substantially increase. To help with this issue, from 6 April 2022, the self-employed with profits below the lower profits limit, of £6,725, will be treated as if they had paid Class 2 National Insurance, even though they will not actual pay any National Insurance.
Self-employed individuals, with profits below £6,725 in 2022-23, can voluntarily pay Class 2 National Insurance, even is they are loss making, and therefore receive a credit of 1 year towards their full (35 qualifying years of) state retirement pension.
Voluntary National Insurance
Individuals can buy additional qualifying years towards their state pension.
Individuals needs 35 qualifying years of National Insurance contributions to receive the full state pension. For every qualifying year lost, through lack of National Insurance contributions, the state pension is reduced by 1/35th.
Individuals can pay Voluntary Class 3 National Insurance in 2021-22 at £15.40 pw, i.e. £800.80 pa, to buy a missing qualifying year.
The full annual amount may not have to be paid. If an individual has 9 months of National Insurance contributions in a year, say through a short-term employment, they only have to top-up their contributions with 12 weeks (3 months) of Class 3 contributions.
The rate of Class 3 National Insurance will increase to £15.85 pw in 2022-23.