Insights

We all knew some tax increases were coming to cover the cost of Covid-19. Business owners are already aware of the increased Corporation Tax and now Boris Johnson has announced a new Health and Social Care Levy. This is being introduced to fund investment in the NHS and to help cap the future costs of social care.

The levy, another name for a tax increase, will have a broad ranging impact and importantly, it will affect absolutely every taxpayer, albeit in different ways. Business owners will be the worst affected because of the way the tax will operate. Here’s what you should understand for now:

The Health and Social Care Levy will initially involve a 1.25% increase in National Insurance Contributions (NICs) and a separate tax on share dividends, starting from April 2022. After April 2023 the levy will evolve to become a separate tax on earned income.

How does the Health and Social Care Levy affect different taxpayers?

Entrepreneurs and business owners
These taxpayers will be most affected right from the outset in three ways. Whoever said the UK was a great place to start and run a business? Starting from April 2022, shareholder directors will pay the 1.25% NIC increase on their own salary and the company will face increased employers’ contributions. The shareholders will also pay an extra 1.25% on dividends extracted from company profits. It means the tax payable on dividends above £2,000 will rise from the current minimum rate of 7.5% to 8.75%, 33.75 per cent and 39.35 per cent, starting from April 2022.

How much will the increased dividend tax cost me?

• A basic rate taxpayer will pay £263 on the first £5,000 of dividends payments — a £38 increase.
• A higher rate taxpayer earning more than £50,270 will pay £2,700 on the first £10,000 of dividends — up by £100.
• An additional rate taxpayer earning more than £150,000, will pay £7,083 on the first £20,000 of dividend income which is currently taxed at £6,858.

PAYE taxpayers
All employees earning above £9,564 will face an extra 1.25% NIC increase on their salary. Workers on a salary of £20,000 will pay an extra £130 and those earning £100,000 will pay an extra £1,130.

Pensioners
These taxpayers will face an increase to NICs starting from April 2022 if they are still working and receiving a pension. Pensioners will also be subject to the increased dividend tax rates, but this will not be levied against earnings as it is for entrepreneurs receiving dividends on profits.

From April 2023 when the NIC element changes to become a free-standing Health and Social Care Levy, all pensioners, including those no longer working, will pay the extra tax.

What next?
If you are a business owner and would like to discuss the implications of this forthcoming change and alternative remuneration options, please get in touch via partners@rjp.co.uk. It may be possible to increase pension contributions to mitigate some of the rises although this will have other implications.

We await further information about this and other potential tax changes, most likely to be announced in the forthcoming Spending Review and Autumn Budget on 27 October 2021.

Note that the Furlough scheme and SEISS are all due to end on 30 September.