Few would disagree that there is an urgent need for increased funding to support the NHS and social care going forward, and I am wholeheartedly in favour of the principle of a Health and Social Care Levy.
However, I am hugely disappointed by the decision to raise these funds by increasing National Insurance contributions rather than income tax and thus taxing earnings rather than wealth. The extra tax burden will largely fall on workers, including minimum wage earners, whilst those with private pensions or property portfolios are not being asked to contribute.
In my opinion, raising income tax rather than National Insurance would have ensured that the responsibility was shared more evenly across all taxpayers, and not just those who happen to have to work for a living.
Employers are also being asked to pay more, and there is a double impact for company owners with dividend taxes increasing too.
How will the Levy be funded?
In summary, from April 2022 the following will all increase by 1.25%:
- Class 1 (primary) National insurance, paid by employees under state pension age
- Class 1 (secondary) National insurance, paid by employers
- Class 4 National insurance, paid by the self-employed
- Dividend tax
There’s no specific mention of Class 1A National insurance, paid by employers in respect of Benefits in Kind (such as vehicles or medical insurance policies) provided to their employees.
The following income is not subject to National Insurance and so will not be affected:
- Bank interest
- Rental income
- State pension income
- Private pension income
Class 1 (primary) National Insurance
In the current tax year, employees over the state pension age pay National Insurance at 12% on annual earnings between £9,568 and £50,270 and 2% on earnings over £50,270.
This will increase to 13.25% and 3.25% from April 2022.
In monetary terms:
- An employee earning £25,000 will pay an additional £192.90 each year
- An employee earning £50,000 will pay an additional £505.40 each year
- An employee earning £75,000 will pay an additional £817.90 each year
From April 2023 it is intended that employees over the state pension age will no longer be exempt from the Levy portion of National Insurance contributions.
Class 1 (secondary) National Insurance
In the current tax year, employers pay National Insurance of 13.8% of an employee’s earnings in excess of £8,840 per year.
This will increase to 15.05% from April 2022.
There is an employer allowance of £4,000 available for most employers so they do not start to pay National Insurance until the total owed exceeds £4,000. It is intended that this employer allowance will apply to the additional Levy.
Class 4 National Insurance
In the current tax year, self-employed individuals over the state pension age pay National Insurance at 9% on annual profits between £9,568 and £50,270 and 2% on profits over £50,270.
This will increase to 10.25% and 3.25% from April 2022.
In monetary terms, the increase will be the same as for employees.
Dividend income
Dividends are currently taxed at 7.5%, 32.5% or 38.1%, depending upon which tax band the income falls into.
These are set to increase to 8.75%, 33.75% and 39.35% from April 2022.
The tax-free dividend allowance of £2,000 is expected to remain, and of course dividends received on shares held within an ISA will not be taxed.
It’s possible that the increase will also be applied to the tax charge on overdrawn directors’ loan accounts (s455 tax) which is currently charged at 32.5%
Legislation has not yet been drafted in respect of the Levy and so there may be changes before it is formally introduced.
If you have any questions about this or any other accounts or tax matter, please get in touch and I’ll be happy to offer you some support.
