NIC increase to fund the social care crisis – what you need to know
Last week, the Government announced their long-awaited solution to reduce the NHS waiting lists and tackle the social care crisis by introducing a new Health and Social Care Levy, in the form of a 1.25% increase to National Insurance Contributions (NICs).
How does the new charge work?
The 1.25% NIC increase will apply from April 2022 to salaries (Class 1 NIC – Employers and Employees), and self employed profits (Class 4 NIC), with a matching 1.25% increase to dividend tax rates so that business owners who pay themselves via dividends also pay the new levy. This increase to dividend taxes will be very unpopular with those freelancers and contractors who work via their limited companies, and were given no financial support during the Covid pandemic.
The April 2022 NIC increase will be replaced with a new levy, from April 2023, shown separately from NICs on employee payslips.
The new tax is expected to raise £12bn a year – allocated for the first three years to relieve the NHS backlog, before being applied to social care funding – breaking the Conservatives manifesto “triple-lock” promise of not raising Income Taxes, NICs or VAT.
A tax on earnings
Whilst media headlines focused on the 1.25% increase, it’s important to note that this is actually a 2.5% tax on salaries (as both employer and employee pay the charge), whereas dividends and sole traders suffer the extra 1.25%. This discrepancy appears to work against the Government’s plans to close the tax gap between the employed and self employed and gig economy.
For salaried employees this will push the combined tax/NIC charge for basic rate taxpayers up to 33.25% and higher rate taxpayers (on total income over £50,270) to 43.25%. The rates get higher for working graduates, who will see a new marginal tax/NIC rate of 42.25% (basic rate) or 52.25% (higher rate). The levy will also be extended from April 2023 to those who continue to work beyond state pension age, setting what many believe is a concerning precedent.
The plans have been widely attacked in the media as a tax on earnings, with many suggesting it unfair for ordinary workers to bear the brunt of the levy whilst the wealthier whose income comprises property income and other investments contribute nothing.
The new charge also widens the tax gap between business owners who pay themselves via dividends and those who pay salary, and will also create significant extra employment costs for many businesses. Any employers that do not currently offer tax efficient rewards for their employees such as pension salary exchange or electric company car packages would be well advised to consider them, as they can produce valuable tax and NIC saving for both employers and employees.
More tax rises to come in the October Budget?
So with this new tax on income, many wonder whether the Government will look to balance the scales and aim their sights at those with asset wealth. On the same afternoon this new levy was announced, the Chancellor also confirmed that his next Budget will be on 27th October.
The March Budget was preceded by rumours of an increase to the Capital Gains Tax (CGT) rates – from their current low rates of 10% and 20% (18% and 28% for residential property) to something more aligned with Income Taxes (40%-45%). However, the Covid situation and extensions to the furlough scheme meant that Spring was not the right time for tax increases.
But with such a gaping hole in the Government’s finances after the economic devastation Covid has left behind, the Chancellor must be looking at every available option to raise funds. Many had identified CGT and Inheritance Tax as the obvious targets – based on the notion that higher taxes for the wealthier were more acceptable to the country and voters as a whole. With the worst of the Covid impact theoretically behind us, all expectations are that CGT will be next in line for a hike.
Ahead of the late October Budget, our recommendation is to take tax and financial advice and consider selling assets now to take advantage of the current low CGT rates.
If you need any further tax advice or want to get in touch with our tax team, contact email@example.com