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NI Increase / Social Care Levy

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NI Increase / Social Care Levy

The governement have announced that all rates of national insurance contributions and income tax on dividends will increase by 1.25 percentage points from 6 April 2022.

This increase in rates will be rebranded as the ” health and social care levy” with effect from April 2023 and kept separate from National Insurance at that time when the national insurance rates will return to the existing rates at that time (subject to change in future budgets).

In addition Self-employed individuals who are over the state pension age on 6 April 2023, will pay the health and social care tax at 1.25% on profits over £9,568 per year. 

Employees currently don’t pay primary class 1 NIC when they reach state pension age, but employers do pay secondary class 1 NIC on the salary of these older workers, unless they fall under one of the exemptions for secondary class 1 such as for ex-forces veterans.

Any employees over state pension age will have to pay the health and social care tax at 1.25% on all of their earnings above £9,568 per year from 6 April 2023. 

Class 1 NIC

Class 1 Primary (employee)2021/222022/23
0–£9,5680%0%
£9,568–£50,27012%13.25%
Above £50,2702%3.25%
Class 1 secondary (employer)  
0–£8,8400%0%
Above £8,84013.8%15.05%
Class 1A13.8%15.05%
Class 1B13.8%15.05%

The upper earning limit of £50,570 is aligned with the income tax higher rate threshold, both of which will be frozen at that level until 6 April 2026, as announced in the Budget on 3 March 2021.

We don’t know at this time whether the primary threshold (£9,568) and the secondary threshold (£8,840) will also be held at those levels for that period.

A person on the minimum wage of £8.91 per hour starts to pay class 1 NIC if they work more than 17.4 hours per week and pays income tax if they work more than 21.13 hours per week.  

Class 4 NIC

 2021/222022/23
0–£9,5680%0%
£9,568–£50,2709%10.25%
Above £50,2702%3.25%

Classes 2 and 3 NIC

These classes of NIC are charged at flat monetary amounts per week, and the government has confirmed that the increase in NIC which will be transformed into the health and social care tax, will not apply to these classes of NIC. Thus, the care tax will not apply to those taxpayers who are only paying class 2 or class 3 NIC. 

Dividend tax

The rates of income tax on dividends received will increase as shown in the dividend tax table below. Dividends received on investments held within ISAs are not subject to the dividend tax.

Dividend tax  2021/222022/23
Basic rate band7.5%8.75%
Dividend allowance£2,000£2,000
Higher rate band32.5%33.75%
Dividend allowance£2,000£2,000
Additional rate band38.1%39.35%
Dividend allowance£2,000£2,000

At this time we don’t know whether the dividend allowance will remain at the same level or be cut in 2022/23.

Possible knock-on effect for loans

Where a director/participator in a close company borrows from that company (eg overdrawn director’s account) and doesn’t repay the loan by the due date of the corporation tax, a section 455 charge is levied at 32.5% of the outstanding loan.

That section 455 charge may also be increased to 33.75% in line with the higher rate of dividend tax from 6 April 2022, but this has not been confirmed. 

If you have any questions regarding these changes please get in touch.