Health and Social Care levy
Rumours of an imminent rise in NI rates started to circulate at the beginning of September, and were confirmed on 7 September with the publication of the government policy paper Build Back Better: Our Plan for Health and Social Care. The increase will initially take the form of a 1.25% increase on certain classes of National Insurance from April 2022, before becoming a separate ring-fenced charge from April 2023. The affected classes are:
Primary and secondary Class 1
Class 1A and 1B
Classes 2 and 3 remain unaffected.
The policy paper states that once the levy is formally separated from NI in 2023, it will be chargeable on earnings for those above State Pension age (but not pension income).
The levy will be able to be offset using the employment allowance. Additionally, companies will not have to pay the levy for certain classes of employee:
" Existing NICs reliefs to support employers will apply to the Levy. Companies employing apprentices under the age of 25, all people under the age of 21, veterans and employers in Freeports will not pay the Levy for these employees as long as their yearly gross earnings are less than £50,270, or £25,000 for new Freeport employees."
Subject to parliamentary approval, the increase will apply to both the lower and higher rates of NI, so for 2022/23 the rates for employed individuals will be 13.25% and 3.25%. For self-employed individuals, the rates will be 10.25% and 3.25%. Both of these will be subject to the usual NI thresholds, e.g. the Primary Threshold, and the policy document confirms that these thresholds will continue to apply once the levy is formally separated from NI in 2023.
At the time of writing, the NI thresholds have not yet been confirmed for 2022/23, although the examples in the document suggest that the Primary Threshold for employees will be £9,700 - e.g. "A typical basic rate taxpayer earning £24,100 will contribute £180 in 2022-23" suggests that (£24,100 - £9,700) x 1.25% = £180, but of course this is purely speculation until the thresholds are confirmed.
Employers will also be affected, with the secondary Class 1 rate increasing to 15.05% for earnings exceeding the Secondary Threshold. Class 1A and 1B will also be set at 15.05%. The government says it is important that both employers and employees contribute, but critics say that employers are likely to absorb the additional cost by restricting pay increases.
In terms of how much the increase will affect people on various levels of salary, its impossible to give a precise calculation until the NI thresholds are published. However, if we assume the £9,700 is going to be the Primary Threshold, this can simply be deducted from the earnings with the difference multiplied by 1.25% to give an estimate.
Gross salary Subject to NI* Additional NI at 1.25%
£20,000 £10,300 £129
£40,000 £30,300 £379
£60,000 £50,300 £629
£80,000 £70,300 £879
£100,000 £90,300 £1,129
* assuming Primary Threshold is set at £9,700
In order to prevent avoidance of contribution by company owner managers, dividend tax rates will also increase from April 2022. The proposed rates for 2022/23 are:
dividends falling into the dividend allowance of £2,000 - 0%
dividends falling into the basic rate band - 8.75%
dividends falling into the higher rate band - 33.75%
dividends falling into the additional rate band - 39.35%
This is yet another blow for small company owners, particularly those with a single director shareholder.
The policy document confirms that the levy will apply to the whole of the UK, not just England, and claims that Wales, Scotland and Northern Ireland will be net beneficiaries, i.e. the devolved administrations will receive more in additional funding than is raised by the residents in those countries.