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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

at all.


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

care costs.


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.

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