Social Care Levy – an extra 1.25% on NIC and Dividend Tax

A new social care levy announced this week aims to raise £12bn a year in a significant retreat from the Conservatives’ manifesto pledge committing not to raise the rates of income tax, national insurance and VAT. 

From April 2022, a new 1.25% Health and Social Care Levy will be introduced. This will initially be based on National Insurance contributions (NICs) and will also see an identical increase in dividend tax rates.

The increased NIC charge of 1.25% will apply to employees (including above state pension age), employers and self-employed Class 4 contributions.

What will it mean to you?

The 1.25% increase in NICs will have the following additional impact:

• £130 a year on a salary of £20,000 (£139 in employer NICs)
• £255 a year on a salary of £30,000 (£264 in employer NICs)
• £505 a year on a salary of £50,000 (£514 in employer NICs)
• £880 a year on a salary of £80,000 (£889 in employer NICs)

Dividend tax rates will also increase similarly. Previous dividend tax rates of 7.5%, 32.5% and 38.1% will be replaced by rates of 8.75%, 33.75% and 39.35% respectively from April 2022, dependant on your marginal rate of income tax.

The new dividend tax rates will result in additional tax of £125 for every £10,000 of dividend received.   This will impact on self-assessment balancing payments for the 2022-23 tax year and payments on account.

The Institute for Fiscal Studies highlights that the tax increase, together with a rise in corporation tax previously announced for April 2023 will take the tax burden to its highest ever sustained level.

These changes will place renewed emphasis on business owners carefully considering their remuneration strategies, and even more so where R&D tax credits claims are involved. It will also be crucial for the self-employed and employees to be aware of the increased burden so they can plan accordingly.

If you would like assistance in reviewing your remuneration strategies or making provision for future tax liabilities, please do not hesitate to contact us.