From April 2022 the government plan to create a UK-wide, 1.25% health and social care levy on earned income, to be spent directly on health and social care. Dividend rates are also increasing by the same amount.
Although it was originally put forward as an increase in national insurance contributions (NICs), it will now be ringfenced purely for health and social care costs. It will be a UK wide tax, so while income tax regimes differ between England, Scotland, Wales and Northern Ireland, this tax will apply to all.
Who will pay the levy?
The levy will be paid by businesses and individuals, including the self-employed, from April 2022. This will be extended in April 2023 to workers who continue to work after state pension age. Currently individuals of state pension age do not pay national insurance. Legislation will be passed to ensure that the charge is an independent tax, discrete from NICs and it will take a year for HMRC to update its systems to accommodate the levy as a separate charge, as opposed to a NICs’ increase on payslips.
Anyone earning less than £9,568 will not have to pay the levy and the majority of small businesses will be exempt. We have yet to hear the conditions surrounding the exemption for small businesses.
Available reliefs for employers
Existing NICs reliefs to support employers will apply to the Levy. Companies employing apprentices under the age of 25, all people under the age of 21, veterans and employers in freeports will not pay the levy for these employees as long as their yearly gross earnings are less than £50,270, or £25,000 for new freeport employees.
The dividend tax will see the current rates of 7.5%, 32.5% and 38.1% rise to 8.75%, 33.75% and 39.35%.
After announcing the measures on 7 September, and despite the initial press coverage suggesting otherwise, the provisions have now been successfully passed by Parliament and is due to apply from April 2022.