National insurance contributions and dividend tax rates will increase by 1.25 per cent from April 2022, with the projected £12bn annual income ringfenced to pay for health and social care.
In a move that breaks the Conservative’s manifesto pledge on raising taxes, the Prime Minister Boris Johnson said the rises will pay for the impact of the coronavirus pandemic on the NHS and address the long-standing funding gap for health and social care.
From April 1, 2022, there will be a temporary 1.25 per cent increase in class 1 (employee) and class 4 (self-employed) national insurance contributions (NIC) paid by workers, as well as a 1.25 per cent increase in class 1 secondary NIC paid by employers (so 2.5 per cent in total).
The increase will apply to employed (include deemed employees) and self-employed individuals and partners earning above the class 1 primary threshold / class 4 lower profits limit (currently £9,568 in 2021/22).
Employers will pay the additional 1.25 per cent for staff earning above the class 1 secondary threshold (currently £8,840 in 2021/22).
Existing reliefs and allowances from employer’s secondary class 1 NIC will apply to the levy, including the £4,000 employment allowance, reliefs for employers of apprentices, newly employed veterans and new employees in freeports.
From April 2023, the increases will be legislated separately as a “health and social care levy” and NIC rates will return to 2021/22 levels.
The revenues will be ringfenced for health and social care. From April 2023, legislation will also extend the revenue raising measure to individuals over state pension age in employment, who are currently exempt from paying NIC.
The levy, including the temporary NIC increase in 2022, will be legislated for shortly.
Dividend tax rise: The impact
Alongside the levy, which will be paid by employees, the self-employed and businesses, the government has announced a 1.25 per cent increase in dividend tax rates from April 1, 2022.
That will take the rates to 8.75 per cent for basic rate taxpayers, 33.75 per cent for higher rate taxpayers and 39.35 per cent for additional rate taxpayers. The £2,000 dividend allowance will remain.
According to calculations, someone taking £45,000 per year in dividends will see their tax bill increase by £378, while someone receiving £75,000 in dividends will pay an extra £753.
Shareholders who hold their investments in a tax-free ISA will not be affected as they do not pay tax on dividend income.
The government says the increase in dividend tax rates will be legislated for in the next Finance Bill and the government estimates that 70 per cent of the revenue raised will be paid for by additional and higher rate taxpayers in 2022/23.
HM Treasury’s analysis of the impacts of the measures concludes that households with the highest 20 per cent of incomes will contribute more than 40 times that of those with the lowest 20 per cent of income, with more than one-third of the overall tax increases coming from the top 10 per cent of households.
However, the analysis does not include projections of the impact of the increase to class 1 secondary NIC paid by employers, stating: “Whether, how and when employers will pass on the impact of this is unclear, particularly in the short run; business may choose to adjust wages, prices or profits.”
Social care contributions
The revenue raising measures will contribute to funding social care in the UK, the financing of which will change from October 2023.
Under the government’s plans the amount individuals will pay towards personal care throughout their life will be capped at £86,000.
Meanwhile, individuals with assets of less than £20,000 will not make any contribution to care costs from savings or the value of their home (an increase from £14,000), and those with assets between £20,000 and £100,000 will be eligible for means-tested support.
The Treasury confirmed that pension funds will be exempt from the tax rises, shielding retirement savings.
Reaction to the announcement
Mike Cherry, chairman of the Federation of Small Businesses (FSB), said: ‘Business owners who have done all they can to retain and support their staff during the pandemic are now being punished with a fresh assault on dividend revenue.’
Kitty Ussher, chief economist at the Institute of Directors, said: ‘The surprise new tax on dividends will yet again target small company directors. Incorporated sole traders and other owner-managers, who relied on dividend income, were the only group of workers that were not supported by the government during the pandemic.”
And Frank Haskew, head of The Institute of Chartered Accountants in England and Wales tax faculty, commented: “This change is likely to be a substantial increase in administrative burdens and costs for businesses with the need to amend payrolls to reflect increased NIC rates from April 2022 followed by a brand-new levy with effect from April 2023.”