Engineer turned tax advisor Sarah Boyes is a senior manager in our Taunton office. Why did you decide to specialise in tax? I worked in industry…
Earlier this month, Boris Johnson announced a new tax rise to fund the Government’s long-awaited plan for health and social care.
The Health and Social Care Levy will impact on employers and business owners as well as employees and the self-employed. In this blog we outline the key changes and consider what can be done to mitigate their impact.
In the short term, National Insurance (NI) will increase by 1.25% from April 2022. At the same time, tax rates on dividends will also increase by 1.25%.
Then from April 2023 onwards the Health and Social Care Levy becomes a separate tax on earned income, with NI rates returning to their current level.
An important difference at this point is that workers over the state pension age, who currently don’t pay National Insurance, will have to pay the 1.25% levy.
The 1.25% increase in National Insurance contributions (NICs) applies to employers as well as employees, and businesses will therefore need to budget for these additional costs from April 2022 onwards.
The annual increase in employee and employer NICs at various salary levels is shown in the table below.
|Salary||Increase in employee NICs||Increase in employer NICs|
People who are self-employed will also see their Class 4 NICs increase by 1.25%.
When it comes to tax-efficient ways of rewarding higher earners, employers may wish to look at share option schemes rather than bonuses, given the increase in NICs payable on salary.
The good news for employers is that existing reliefs on NICs, including the employment allowance, will also apply to the new levy.
Salary sacrifice could become an even more tax efficient way of making pension contributions, as this reduces the salary on which NICs are paid, resulting in a saving for both employee and employer. However, we await details on how the new levy will interact with salary sacrifice arrangements.
The rise in tax on dividends came as something of a surprise, apparently to fend off accusations that the widely trailed increase in NI would unfairly place the burden of funding health and social care on those who receive their earnings in the form of a salary.
Business owners contemplating how to extract profits may want to bring forward planned dividends before the 1.25% tax rise takes effect in April 2022, as the tax saving could be significant.
Even after the increase, dividends will continue to be more attractive than salary as a means of taking profits from companies, especially for higher earners, despite the planned increase in corporation tax to 25% in 2023.
Dividend tax rates in 2022-23 will still be lower than the corresponding income tax rates: 8.75% at the basic rate; 33.75% at the higher rate; and 39.35% at the additional rate.
It’s worth noting that the 1.25% increase in dividend taxes applies to all businesses. There is no attempt to distinguish between dividends from owner managed companies and larger corporates – it’s a sweeping change.
The Health and Social Care Levy is expected to raise £36 billion over the next three years, with the bulk of this being used to help the NHS catch up on the treatment backlog that has grown during the pandemic. Several commentators have already questioned whether it’s realistic to expect the NHS’s funding needs to decrease in future so that more of the levy goes into funding social care.
Once it is separated out from National Insurance, the hypothecated – or ring-fenced – Health and Social Care Levy could be a more politically palatable tax for governments to increase in future. If and when this happens, would tax on dividends rise accordingly? At this stage we can only speculate.
The levy introduces more complexity to the tax system and another deduction for payroll teams to administer.
It will also be interesting to see how the levy interacts with salary sacrifice when it is a standalone tax. Given the need to raise revenue, the Government could look to restrict methods for reducing NI, apart from the employment allowance and reliefs for employers of apprentices under 25, employees under 21, veterans and those located in freeports.
Extending the levy to those over state pension age, who don’t currently pay employee’s NI (though employer’s NI continues to be due), means that as the state pension age increases and people work for longer, they will now have to make a continuing contribution. This could make some jobs more marginal for those over retirement age, at a time when expanding the domestic workforce has an important role to play in tackling labour shortages.
More details can be found in the Government’s plan for health and social care document.