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.
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.
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.
Comment from Mellor Oxland on these changes: “Although there are concerns about the new charge being paid solely by employed earners, it seems likely that in principal many taxpayers will not object to paying the levy or the increased dividend charge because from April 2023 the funds will be earmarked via legislation for the NHS and Social Care. However, owner managed businesses may consider it appropriate to accelerate payment of bonuses, or company dividends, and those who are self-employed may want to accelerate income where possible, to avoid the temporary increase in NIC and dividend tax that will apply after 5 April 2022”.