National insurance contributions and dividend tax rates will increase by 1.25 percentage points across the UK from April 2022, with the projected £12bn annual income to be ringfenced to pay for health and social care.
In a move that breaks the Conservative’s manifesto pledge on raising taxes, the Prime Minister has confirmed that rates of national insurance are to be increased to pay for the impact of the coronavirus pandemic on the NHS and to address the long-standing funding gap for health and social care.
From 1 April 2022, there will be a temporary 1.25% increase in class 1 (employee) and class 4 (self-employed) national insurance contributions (NIC) paid by workers, as well as a 1.25% increase in class 1 secondary NIC paid by employers (so 2.5% in total). The 1.25% increase will also apply to class 1A and class 1B NIC paid by employers.
The increase will apply to employed (include deemed employees) and self-employed individuals and partners earning above the class 1 primary threshold / class 4 lower profits limit (currently £9,568 in 2021/22). Employers will pay the additional 1.25% for employees earning above the class 1 secondary threshold (currently £8,840 in 2021/22). Existing reliefs and allowances from employer’s secondary class 1 NIC will apply to the levy including the £4,000 employment allowance, reliefs for employers of apprentices, newly employed veterans and new employees in freeports.
From April 2023, the increases will be legislated separately as a “health and social care levy” and NIC rates will return to 2021/22 levels. The levy will be hypothecated in law, meaning that the revenues will be ringfenced for health and social care. From that date, the legislation will also extend the revenue raising measure to individuals over state pension age in employment or self-employment, who are currently exempt from paying NIC.
The levy, including the temporary NIC increase in 2022, will be legislated for shortly.
Reacting to the announcement, Frank Haskew, Head of ICAEW’s Tax Faculty, commented: “This change is likely to be a substantial increase in administrative burdens and costs for businesses with the need to amend payrolls to reflect increased NIC rates from April 2022 followed by a brand new levy with effect from April 2023.”
Alongside the levy, which will be paid by employees, the self-employed and businesses, the government has announced a 1.25% increase in dividend tax rates from 1 April 2022, taking rates to: 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers and 39.35% for additional rate taxpayers. The £2,000 dividend allowance will remain.
The increase in dividend tax rates will be legislated for in the next Finance Bill and the government estimates that 70% of the revenue raised will be paid for by additional and higher rate taxpayers in 2022/23.
The tax-raising measures and their impacts are outlined in the government’s plan for health and social care, which was published alongside the Prime Minister’s speech. It estimates that of the £12bn revenue expected to be raised each year, £11.4bn will come from the levy.
HM Treasury’s analysis of the impacts of the measures concludes that households with the highest 20% of incomes will contribute more than 40 times that of those with the lowest 20% of income, with more than one-third of the overall tax increases coming from the top 10% of households.
However, the analysis does not include projections of the impact of the increase to class 1 secondary NIC paid by employers, stating: “Whether, how and when employers will pass on the impact of this is unclear, particularly in the short run; business may choose to adjust wages, prices or profits.”
The revenue raising measures will contribute to funding social care in the UK, the financing of which will change from October 2023. Under the government’s plans the amount individuals will pay towards personal care throughout their life will be capped at £86,000.
Meanwhile, individuals with assets of less than £20,000 will not make any contribution to care costs from savings or the value of their home (an increase from £14,000), and those with assets between £20,000 and £100,000 will be eligible for means-tested support.
- Government’s plan for health and social care ‘Build back better’.
- HM Treasury’s analysis of the impact of ‘Build back better’ plan.
- The Chancellor’s statement on the government's health and social care and the need to raise taxes.
- Hypothecation of taxes – a cure to austerity?
- Rethinking taxation of work (TAXline, August 2021)
- What COVID-19 means for the future of tax (Tax News, 7 April 2021)
This guidance is created by the Tax Faculty, recognised internationally as a leading authority and source of expertise on taxation. The Faculty is the voice of tax for ICAEW, responsible for all submissions to the tax authorities. Join the Faculty for expert guidance and support enabling you to provide the best advice on tax to your clients or business.
- 08 Sep 2021 (12: 00 PM BST)
- Further to information received overnight from HMRC, an additional sentence has been added (paragraph two): 'The 1.25% increase will also apply to class 1A and class 1B NIC paid by employers'
- 08 Sep 2021 (12: 06 PM BST)
- Further to information received overnight from HMRC, additional wording has been added (paragraph four): The words 'or self-employment' were added to this sentence - 'From that date, the legislation will also extend the revenue raising measure to individuals over state pension age in employment or self-employment, who are currently exempt from paying NIC'