As many will be aware the government will soon implement a new ‘health and social care levy’, initially in the form of a temporary 1.25% rise in National Insurance contributions (NIC’s) between April 2022 and April 2023, followed by a distinct new 1.25% levy from April 2023, with the funds raised being ringfenced for health and social care.
To help fund the health and social care package, the rates of dividend tax for individuals will similarly be increased from April 2022 by 1.25% above the current rates across all tax bands.
With any changes to the way income is taxed, it is important to consider if anything can be done now to mitigate the impact, whether you are a business owner, an employee, self-employed or simply an investor in stocks and shares.
Social Care Levy
Tax rates
The increased NIC tax rates that apply from April 2022, becoming the social care levy from April 2023, are:
| National Insurance Contributions | Employee Class 1 NIC | Employer Class 1, 1A and 1B NIC | Self Employed Class 4 NIC |
| Current rates | 12% / 2% | 13.8% | 9% / 2% |
| Tax Year 2022-23 | 13.25% / 3.25% | 15.05% | 10.25% / 3.25% |
| Tax Year 2023-24 | 12% / 2% | 13.8% | 9% / 2% |
| Health and Social Care Levy | Employees | Employers | Self Employed |
| Tax Year 2023-24 | 1.25% | 1.25% | 1.25% |
Who is affected?
For individuals, the Social Care Levy will be charged on earnings and self-employed profits, therefore those whose income is derived from other sources such as bank interest, rental income, pension draw downs and capital gains won’t be affected.
Another point to note is that, although the temporary increase in NIC’s will only affect those already within its scope (excluding Class 2 and voluntary Class 3 contributions), from April 2023 the Social Care Levy will extend this scope further to include the earnings of employees over the State Pension Age.
How you can plan ahead to manage the increase:
- Employers – consider offering different forms of remuneration, such as
- Pension contributions for key staff, Tax/NIC free for employers and potentially for employees subject to the relevant allowances.
- Offering benefits in kind with a low value for Tax and NIC purposes, such as electric company cars. Care should be taken to ensure these would not fall within the ‘optional remuneration arrangement’ rules, such that the benefit in kind value would be the salary foregone by the employee.
- Tax advantaged share schemes, such as EMI, to incentivise key staff members rather than traditional cash bonuses.
- Employees - explore the possibility of sacrificing salary / increasing existing arrangements with regards to pension contributions, which would lower the income charged to tax and NIC / Social Care Levy.
Dividend Tax
Tax rates
The increased dividend tax rates that apply from April 2022 are:
| Current rates | From Tax Year 2022-23 | |
| Basic rate | 7.5% | 8.75% |
| Higher rate | 32.5% | 33.75% |
| Additional rate | 38.1% | 39.35% |
Who is affected?
Anyone for whom dividends form a large part of their annual income, likely to be owner managers and large personal investors, will be most affected. As in recent tax years, the first £2,000 of dividend income received will continue to be taxed at 0%, therefore individuals with small investment portfolios are unlikely to be affected by the increase.
It’s also important to note that, for owner managed businesses, the tax on overdrawn director’s loan accounts under s455 CTA 2010 is directly linked to the dividend upper rate, which will mean the s455 rate will also be increasing from 32.5% to 33.75%.
How you can plan ahead to manage the increase:
- Individuals - consider tax free stocks and shares ISA’s rather than a simple investment portfolio. If married or in a civil partnership, spreading investments between you and your partner can also help to maximise your respective tax allowances.
- Owner managers - It may be advisable to consider voting higher dividends before the increase comes into operation, although this would need careful consideration and will be dependent upon the circumstances.
Reaction to these tax increases
The measures have faced intense criticism from opposition parties and even certain sections of the Conservative party, arguing that the tax increases will further contribute to the cost-of-living crisis and should be postponed or even scrapped altogether.
The government recently confirmed that they are ‘fully committed’ to carrying out the increases as planned from April 2022 however, describing them as essential to tackle the NHS backlog that has built up and the long-term issue of reforming social care.
Find out more
For further guidance on this topic, please contact your usual MHA advisor or Contact Us.
Read the latest tax commentary - visit our dedicated Spring 2022 Forecast Statement Hub.
We will be providing resources, advice and practical guidance from our experts to help you prepare and manage the impact of upcoming tax changes.
