Health and Social Care Levy and increase in tax rates applicable to dividends

The Prime Minister on 7 September 2021 announced plans to substantially increase funding for health and social care over the next three years, to be funded by a new tax: the Health and Social Care Levy and on 8 September 2021, the Health and Social Care Levy Bill 2021-22 was introduced.

Temporary increase to NICs rates

For administrative reasons, HMRC cannot introduce an entirely new tax (with a new tax base) in time for April 2022.  The HSC levy will therefore be implemented by temporary NICs rises for the first year.

From 6 April 2022, there will be a temporary 1.25 percent increase in the rate of Class 1, 1A and 1B National Insurance Contribution (NICs).  This means employee's NICs rates will increase to 13.25% (below the Upper Earnings Threshold) and to 3.25% (above that threshold).  Employer's NICs rates will increase to 15.05%.

New HSC levy

From 6 April 2023, the new HSC Levy will apply to both employers and employees (including those above the state pension age) at a rate of 1.25% (i.e. a combined rate of 2.5%).  NICs rates will return to their current levels (i.e.  employee's NICs rates of 12% and 2% and employer's NICs rates of 13.8%.

Increase in tax rates for dividends

From 6 April 2022, there will also be a 1.25% increase in tax rates applicable to dividend income.  Currently the ordinary rate, upper rate and additional rate are 7.5%, 32.5% and 38.1% respectively.

From 6 April 2022, the rates will each increase by 1.25% to 8.75%, 33.75% and 39.35%.  The dividend trust rate of income tax will also increase from 38.1% to 39.35% from 6 April 2022 to remain in line with the additional rate.  There will be no change to the dividend allowance of £2,000.

The government argues that business owners and investors (who receive their income in the form of dividends, rather than earnings) should make a “contribution in line with that made by employees and the self-employed on their earnings"

HSF comment:

Companies should consider a communications exercise to employees to highlight the increase in rates.

Companies who have entered into agreements with employees for the transfer of employer's NICs, may wish to consider for the tax year 2022/2023 when the temporary NICs increase applies, whether limitations should be applied to such agreements to provide that employees only meet employer's NICs charges up to the current rate.