Taxpayers face an increase in their National Insurance contributions (NICs) and dividend tax rates from 2022. To better understand how this significant change may affect you, please refer to our helpful FAQ below:
How much is the National Insurance rate increasing?
The Health and Social Care Levy will see NICs increase by 1.25 percentage points, UK-wide.
When will National Insurance rates increase?
The Health and Social Care Levy will effectively be introduced from April 2022. From 2023 it will then “be formally separated out” under new legislation and employees will see it clearly represented on their payslips. At this point, the Levy of 1.25 per cent will be formally implemented and NIC rates will, for all intents and purposes, return to current levels.
How will the Health and Social Care Levy be administered?
The levy will be administered by HMRC and collected through the reporting and collection procedures already in place for NICs – PAYE and Income Tax Self-Assessment.
Who will the increase affect?
The increase in NICs will initially affect everyone who is over the age of 16, but below state pension age, and earning more than £184 per week through employment (Class 1) or with profits of £6,515 or more a year from self-employment (Class 4). The increase also applies to employer contributions.
From 2023, the Health and Social Care Levy will also apply to individuals working who are older than state pension age, with employment income or profits from self-employment exceeding £9,568. Currently, this group are not required to pay any NICs.
Are there any exemptions to the National Insurance increases?
The increase will not apply to Class 2 NICs, which is the flat rate paid by the self-employed with profits exceeding the Small Profits Threshold (currently £6,515 per year) or Class 3 NICs.
This class of NIC is made up of voluntary contributions from taxpayers to fill in gaps in their contributions’ records to qualify for benefits.
How will the increase in National Insurance rate affect my earnings?
The amount you earn will affect how much you pay to the Health and Social Care Levy.
Here are some examples of how much you will pay towards the levy, in addition to your existing NICs, depending on your earnings:
- £20,000 per year – £130
- £30,000 per year – £255
- £50,000 per year – £505
- £80,000 per year – £880
- £100,000 per year – £1,130
*Amounts and rates may differ for the self-employed.
Will the new health and social care reforms affect dividends?
Dividend tax rates will be increased by 1.25 percentage points to help fund the health and social care reforms. From April 2022, those in receipt of dividends will retain the £2,000 tax-free dividend allowance but will see 1.25 percentage points added to each rate of dividend tax beyond the allowance.
How will changes to dividends tax affect ‘every day’ investors?
Shares held in ISAs are not subject to dividend tax, while the £2,000 tax-free dividend allowance combined with the personal tax-free allowance of £12,750 means that 60 per cent of individuals with dividend income outside of ISAs are not expected to pay any dividend tax and won’t be affected.
Nevertheless, many SME business owners are likely to find themselves caught by the change.
How much money do the government expect to make by increasing NICs and dividend tax?
It is anticipated that the changes will raise an additional £12 billion annually.
Will the changes to health and social care affect my estate?
It will have little impact on a person’s estate from a tax perspective. However, a new lifetime care cost cap and the means-tested system will mean that from 2023, more complex or long-term care costs should be limited, potentially leaving more for future generations.
How will the new means-tested system work?
The new test for adult social care will come into effect in October 2023 based on a person’s income and savings, as follows:
- Total assets above £100,000 – Full fees must be paid but the maximum that a person will have to pay over their lifetime towards personal care costs will be £86,000 as a result of the new cap. If by contributing towards care costs, the value of a person’s remaining assets falls below £100,000, they are likely to be eligible for some financial support.
- Total assets between £20,000 and £100,000 – Local authorities may fund some care costs. However, individuals will be expected to contribute towards the cost of their care from their income, but if that is not sufficient, they will contribute no more than 20 per cent of their chargeable assets per year.
- Total assets less than £20,000 – These individuals will not have to pay anything for their care from assets. However, they may still need to make a contribution towards their care costs from their income.
Further details of the financial impact and rules surrounding dividend tax and National Insurance is expected in a future Budget and will be introduced in the next Finance Bill.
This change may have a significant impact on existing care and retirement plans, as well as your current remuneration strategy.
If you own or operate a business it may also have a substantial impact on your employment costs and payroll administration.
For advice on how this change may affect you, or your business, please contact our team of chartered accountants, tax and business advisers, and payroll professionals today.