The launch of a social care levy from 2022 will see all taxpayers facing a 1.25% tax charge.
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
From next April the government will create a UK-wide, 1.25% health and
social care levy on earned income, hypothecated in law to health and social
care, with dividends rates increasing by the same amount. There will also be
changes to the amount of savings people can retain when facing a move into
care costs and a cap on total cost liability for anyone paying for care home
accommodation and care.
The new tax is set to raise £12bn a year and marks a major departure from
the Conservatives' manifesto which committed to the triple lock on income
tax, national insurance and VAT.
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. 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.
This means that people earning £24,000, less than the average wage, would
pay an additional £260 a year for the levy, which will be clearly indicated
as the social levy on pay slips. Anyone earning less than £9,680 will not
have to pay the levy.
A typical higher rate taxpayer earning £67,100 will contribute £715.
Additional rate taxpayers make up just 2% of individuals affected but will
contribute nearly 20% of the revenue raised from individuals.
The dividend tax will be legislated in the next Finance Bill and the
government said that additional and higher rate taxpayers are expected to
contribute over 70% of the revenue from this increase in 2022-23.
In a speech in parliament, the prime minister Boris Johnson said: 'We will
fix the long-term problems of health and social care. From next April we
will create a health and social care levy of 1.25% and the dividend rate
will rise by the same amount with the levy going to social care across the
whole of the UK.'
He added: 'We need reform and change, we need to build back better. When
Covid started, 30,000 beds in hospitals were used by people waiting for care
home beds. Governments have ducked this problem for decades. There can be no
more dither and delay, and we cannot rely on insurance as the premiums would
be too high.'
Johnson said the plan to create a specific levy as opposed to raising income
tax, for example, was to ensure that the charge was spread across
individuals and businesses.
'Our new levy will share the cost between individuals and businesses, and
everyone will contribute according to their means, including those above
state pension age, so those who earn more those who earn more will pay
more,' said Johnson.
'Income tax is not paid by businesses so the whole burden would rest on
individuals. The new levy will fall on businesses and individuals. And the
highest earners will pay the majority.
'And because we are also increasing dividends tax rates we will be asking
better-off business owners and investors to make a fair contribution too.'
He stressed that the highest earning 14% will pay around half the revenues,
no-one earning less than £9,568 will pay the levy, and the majority of small
businesses will be exempt, with 40 per cent of all businesses paying nothing
This 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.
Existing NICs reliefs to support employers will apply to the Levy. Companies
employing apprentices under the age of 25, all people under the age of 21,
veterans and employers in freeports will not pay the levy for these
employees as long as their yearly gross earnings are less than £50,270, or
£25,000 for new freeport employees.
James Ross, partner at law firm McDermott Will & Emery, said: 'As far as
individuals are concerned, the government has made some attempt to address
the inequities of increased taxation on earned income by increasing the rate
of tax on dividends (in order to reduce the benefits of routing income
through service companies).
'This, however, introduces asymmetries elsewhere in the tax system. 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.'
Care cost cap
There will also be wide-ranging changes to the costs paid by people facing
residential care. The PM set out plans for a limit on what people can be
expected to pay. From April 2023, no-one starting care will have to pay more
than £86,000 towards their care.
Currently, anyone in England with assets over £23,250 must pay for their
care in full.
The savings limit will also be increased to £20,000 from the current
£14,000, which means that they will not have to make any contribution to
Meanwhile anyone with assets between £20,000 and £100,000 will be eligible
for some means-tested support. This new upper capital limit of £100,000 is
more than four times the current limit. However, if a person's total assets
are over £100,000, full fees must be paid.
The supporting document primarily sets out ongoing issues with NHS backlogs
and plans to address this, but also gives brief details on how the new asset
limits will work.
When these reforms are implemented, around 150,000 people will directly
benefit at any one point in time.
A white paper on integrated health and social care will be released later
this year setting out more detailed plans.