In order to fund increased expenditure on health and social care, the Government has introduced the Health and Social Care Levy from 6 April 2023. As a transitional measure, for the 2022/23 tax year only, there will be a temporary increase to the rates of National Insurance contributions (NICs) paid by employers, employees and the self-employed. There will also be a corresponding increase to the dividend rates of taxation. The Government has announced that any additional tax raised through the temporary NICs increase or the new levy will be ring fenced for the NHS and equivalent bodies.
These measures are projected to raise some £12bn annually across the UK. "What happens now?
As of 6 April 2022, the various NIC rates applying to employees, employers and the self-employed will all increase by 1.25%.
Employees and the self-employed who are liable for class 1 or class 4 NICs, currently pay NICs on their earnings above £9,880 (in the case of employees, that is the primary threshold for class 1 NICs; for the self-employed it is the class 4 lower profits limit).
However, from 6 July 2022 these thresholds will rise to £12,570 to match the income tax personal allowance. This means that from 6 July 2022 individuals that earn up to £12,570 will not pay any NICs and the 1.25% increase will not affect them.
The temporary rates increase will not apply to class 2 or class 3 voluntary contributions.
Employers are also affected, and the Employers' rate of NICs will increase from 13.8% to 15.05% for earnings over £9,100 a year. It's worth noting that different thresholds can also apply to employers in Freeports. More details on the various rates and thresholds for NICs can be found here.
What happens in April 2023
On 6 April 2023, the NIC rates increase will be reversed and the Health and Social Care Levy (HSCL) will take effect . For individual employees and the self-employed, this switch should not effect their take home pay as the combined rates of NICs and HSCL will be the same as the increased rates of NICs currently payable. The main difference will be that they will see their deductions separated in their pay slips and/or tax computations. However, workers above the state pension age will see a tangible difference from 6 April 2023. People above the state pension age currently do not pay NICs and will be unaffected by the temporary rates increase. However, the HSCL will apply to their earnings, so they will see the tax rise take effect in April 2023.
As expected, internationally mobile workers remain unaffected. Overseas employees who are temporarily seconded to the UK will remain outside the scope of NICs, and will also be outside the scope of the HSCL once it comes into force.
Dividend rates
To align employment income with dividend income, the rates of dividend taxation also increased on 6 April 2022 by 1.25% across all bands. The new rates of income tax on dividends are now:
- Basic rate taxpayers – 8.75%
- Higher rate taxpayers – 33.75%
- Additional rate taxpayers – 39.35%
As the purpose of this increase is parity between earned income and dividend income, any revenue raised by the extra 1.25% will be ring fenced for the NHS and equivalent bodies.
Other Forms of Income
Other forms of income remain unaffected by these changes. Specifically, there are no increased taxes on:
- Property rental income (which is subject to income tax only at the normal rates and bands for each UK jurisdiction). This will also apply to some forms of investment income which are not taxed as dividends, for example, property income distributions paid by REITs; and
- Savings income – e.g., interest - (which will remain subject to income tax at the main UK rates of 20%/40%/45%)
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