Under Boris Johnson’s newly announced plan to boost health and social care funding, we can expect to pay an increase in our National Insurance contributions (NICs) and the rate of dividend tax by 1.25% from April 2022.

The controversial move comes as a result of the financial impacts of Covid-19. Johnson says the increase is necessary given the burden the pandemic has placed on our NHS.

What’s happening?

Employees, employers and the self-employed will all pay an increase of 1.25 percentage points for National Insurance (NI) from April 2022.

  • Employees pay NI on their wages
  • Employers also pay extra NI contributions for staff
  • The self-employed pay NI on their profits

Then from April 2023, National Insurance will return to its current rate, and the extra tax will be collected as a new ‘Health and Social Care Levy’ and the exact amount employees pay will be visible on their pay slips.

The Government also plans to increase the rate of dividend tax, which is payable on dividend earnings above £2,000 per year by 1.25 percentage points from April 2022 for taxes on company dividend payments.

But dividends held inside an Isa will not be taxed.

Initially, the government have said the changes, expected to raise £12bn a year, will go towards easing pressure on the NHS.

A proportion will then be moved into the social care system over the next three years.

In addition, the Government has confirmed that from October 2023, anyone in England with assets (such as homes, savings and investments) under £20,000 will have their care costs fully covered by the state. Those with between £20,000 and £100,000 will be expected to contribute towards their costs but will also receive partial support. Anyone with over £100,000 will not receive any support.

The Government will also introduce a new £86,000 cap on the amount anyone in England will need to spend on their personal care over their lifetime. Currently, anyone with assets worth more than £23,250 has to fund their care in full.

Although the new social care reforms will apply only to England, the tax changes will affect the whole of the UK. But the income from the new Health and Social Care Levy will be distributed across the four nations, providing Scotland, Wales and Northern Ireland with an extra reported £1.1bn in funding by 2024-25.

How much will I have to pay in NICs?

To break this down, from April 2022:

  • the current 12% rate on earnings between £9,564 and £50,268 will rise to 13.25%
  • the current 2% rate on earnings over £50,268 will rise to 3.25%
  • employers will also have to pay more, contributing 15.05% in National Insurance on employees’ earnings over £170 per week, up from 13.8% now.

Here’s how your National Insurance payments will be impacted:

  • People earning £10,000 a year now paying £52 will pay £5 extra
  • People earning £20,000 a year now paying £1,251 will pay £130 extra
  • People earning £30,000 a year now paying £2,452 will pay £255 extra
  • People earning £40,000 a year now paying £3,652, will pay £380 extra
  • People earning £50,000 a year now paying £4,852 – will pay £505 extra

Note: People earning under £9,564 don’t have to pay National Insurance and won’t have to pay the new levy.

How will my Dividends be affected?

For those taking home more than £2,000 a year, you are set to face a slightly higher bill!

To break this down, from April 2022:

  • Basic rate taxpayers receiving £3,000 in dividends must pay dividend tax on £1,000 and see their bill rise from £75 to £82.50.
  • Higher rate taxpayers, on a £10,000 dividend, will pay 33.75 per cent on £8,000 of dividends with a dividend tax bill of £2,700. This is an increase of £100 from the current system.

Criticism

There has been criticism that the tax hike will be unfair on the younger and lower-paid earners, however the government stresses it will hit higher earners harder, and has confirmed that those of state pension age who are still working will also have to pay the contributions, aiming to address the claims.

Further criticism comes as the increase breaks a pledge made during the 2019 general election not to raise VAT, income tax or national insurance. However, the Prime Minister defends the decision.

“It breaks a manifesto commitment, and I do not do that lightly; but a global pandemic was in no one’s manifesto,” he said.

The health secretary, Sajid Javid, is expected to set out further details later this year of how the money will be spent in the NHS and social care systems, which the government says will become more closely integrated.

How can we help?

If you have any concerns over the implications this will have on you or your business contributions, please don’t hesitate to call your usual advisor or email intouch@haroldsharp.co.uk.

 

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