The launch of a social care levy from 2022 will see all taxpayers facing a 1.25% tax charge under government plans, while dividend tax will also rise by the same amount.
From next April the government will create a UK-wide, 1.25% health and social care levy on earned income, with the funds specifically dedicated in law to health and social care, with interestingly dividends rates increasing by the same amount.
Although it was originally floated as an increase in national insurance contributions (NICs), it will now be ringfenced purely for health and social care costs. Could it therefore be argued that by introducing a new tax it could be claimed no manifesto promise has been broken?
The levy will be paid by businesses and individuals, including the self-employed, from April 2022, and this will be extended in April 2023 to workers who continue to work after state pension age. Legislation will be passed to ensure that the charge is an independent tax, discrete from NICs and it will take a year for HMRC to update its systems to accommodate the levy as a separate charge, as opposed to a NICs’ increase on payslips.
In UK terms it means that people earning £24,000, less than the average wage, would pay an additional £260 a year for the levy, which is to be clearly indicated as the social levy on pay slips. Anyone earning less than £9,568 will not have to pay the levy.
A typical rest of the UK higher rate taxpayer earning £67,100 will contribute £715. Additional rate taxpayers make up just 2% of individuals affected but it is expected that they will contribute nearly 20% of the revenue raised from individuals.
In Scotland though the situation is worse as higher earners in Scotland who have employment income between the Scottish and UK higher rate thresholds for income tax (currently £43,662 and £50,270), these changes would mean that next year, this portion of their income would be taxed at a marginal rate of 54.25 per cent, compared to 33.25 per cent for people elsewhere in the UK. Ouch!
This is because the upper earnings limit for National Insurance, the point at which the rate of NI paid will fall from 13.25 per cent to 3.25 per cent, is linked to the UK, not Scottish, higher threshold. This anomaly has existed since the introduction in 2017 of different Scottish and UK higher rate tax thresholds.
The dividend tax, which will see the current rate of 7.5% rise to 8.75%, and is expected to raise an estimated £600m; this will be legislated in the next Finance Bill. This will continue to be collected through taxpayers self-assessment tax returns. Our thoughts are that this could be the ‘thin end of the wedge’ and we wouldn’t rule out further increases to those receiving dividends in the future. This is particularly hard as many of these taxpayers did not benefit in any way from the furlough or Self Employed Income Support Scheme.
The levy will raise an estimated £12bn a year, with money from the levy going directly to health and social care across the whole of the UK with Scotland and other Home Nations receiving a share through the Barnett Formula. Overall, it is expected that most employees will pay more than they would have if the government had decided to fund this package through income tax.
Note existing NICs reliefs for employers will apply to the Levy. This include companies employing apprentices under the age of 25, all people under the age of 21, veterans and employers in freeports as long as their yearly gross earnings are less than £50,270, or £25,000 for new freeport employees.
Overall this, new levy creates further discrepancies in the UK tax system. Aside from the Scottish tax anomalies referred to above the top rate of tax on dividends will increase to 39.35% - nearly twice the 20% top rate of tax on capital gain. Individuals who hold material shareholdings in trading or investment companies will have clear incentives to try and structure their returns as capital gains rather than dividend income but we wouldn’t rule this ‘window of opportunity’ being closed quickly with the much talked about alignment of capital gains tax rates with income tax being introduced. WATCH THIS SPACE!