Prime Minister hikes National Insurance to pay for planned health and social care reforms

After much speculation Boris Johnson has unveiled his long-term plans for social care and the NHS through the introduction of a Health and Social Care Levy.

9th September 2021

There has been very little detail released at this stage, but the key points are as follows:

  • This will be introduced from April 2022 as an increase of 1.25% to the rates of National Insurance before being shown as the separate Levy from April 2023. The increase will apply to employers, employees and the self-employed.  This will therefore be an effective 2.5% increase for those individuals who own their own company and pay both the Employer and Employee Levy on their salary.
  • It will include individuals who are exempt from paying National Insurance, such as those over State pension age
  • The amount of Levy payable will therefore depend on an individual’s income for the year with examples being:
    • No Levy payable for those earning less than £8,840 and only Employer payments due for those earning less than £9,568
    • An additional £192.50 payable by someone earning £25,000
    • An additional £505 for someone earning £50,000

Existing reliefs that apply for NIC purposes will also apply to the Levy.  For example, the Employment Allowance will be available and businesses with employees under the age of 21 or apprentices under the age of 25 will not be subject to the Levy on these employees’ income.

The Levy does again highlight the benefits that can be obtained by making use of certain salary sacrifice arrangements, such as with regards pension contributions or the implementation of share schemes to reward staff.  The additional savings will make these more attractive for both Employers and Employees.

In addition, there will also be an increase of 1.25% in the rate of tax shareholders pay on the dividends they receive.  As it is a straightforward increase in the rate of tax, it will have no impact on individuals who pay no tax on the dividend income, such as if the shares are held in ISAs or fall within the £2,000 dividend allowance.

Click here to access the government’s policy paper for Health and Social Care.

David Shearer, a tax specialist at financial experts Old Mill comments ‘Whilst we welcome the fact that this government is seeking to tackle much needed social care challenges, there will be inevitable concerns about the timing and potential impact on many businesses.

‘We are looking at a total tax burden that’s been increased to record peacetime levels and there are widespread concerns that these measures could potentially stifle jobs growth pushing up payroll costs just as Mr Sunak’s furlough scheme comes to an end.

‘Initial analysis suggests that over the last six months this government has announced £36 billion of tax rises which is far bigger than any previous Budget over the past 50 years. These reforms also seem at odds somewhat with previous measures like the Super-Deduction scheme brought in to stimulate investment and growth in the economy’.

Shearer also goes on to say ‘The new tax on dividends is yet again another ‘kick in the teeth’ for small company directors. It seems that the smallest businesses are bearing the brunt of tax reform as this group of sole traders and owner-managers running incorporated firms were overlooked during the pandemic in terms of access to support and this adds in another unforeseen challenge as they try to get back on track.’

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