How Will the New Health and Social Care Tax Impact You?

October 7, 2021 9:16 am Published by

On 7th September 2021 the U.K Government announced the introduction of a new Health and Social Care tax measure to fund social care in England and to help the NHS recover from the Coronavirus pandemic.

Read our latest blog post to find out what the new plans involve and how they will affect you.

What are the New Plans?  

The policy states that for employees, employers, and the self-employed, there will be a 1.25% increase to National Insurance (NI) from April 2022.

This increase in NI is only temporary however, as from April 2023, National Insurance will return to its current rate, and the extra tax will instead be collected as a new Health and Social Care Levy.

Unlike National Insurance, the Health and Social Care Levy will also be paid by state pensioners who are still working.

What is National Insurance?

National Insurance is a tax paid by both employees and employers. Self-employed workers also pay National Insurance on their profits.

The tax was introduced in 1911 as a means of providing a fund for those who had lost their jobs or who needed medical attention. The money is now used to pay for the NHS, entitlement to unemployment benefits, and the state pension.

Employees currently pay 13.8% of their earnings to National Insurance, while employers pay 12% of each employee’s earnings, up to £50,000 a year. Anything earned above this amount is taxed at 2%. 

Why is the Tax Increase Happening?  

The aim of the policy is to provide a long-term solution to funding health and social care in the U.K. and help the NHS recover from the impact of the pandemic.

The Government estimates that the changes will raise £12 billion a year, which will initially be directed towards easing pressure on the NHS. A proportion of the funds will then be transferred into the social care system.

The objective is to ensure that people living in England pay no more than £86,000 in care costs over their lifetime. In addition, those with assets worth less than £100,000 will receive subsidised costs, and those with assets less than £20,000 will have their care completely funded by the state.

What Does This Mean for Employees?  

Those earning under £9,564 a year, or £797 a month, do not currently pay National Insurance and therefore will not see an increase in NI nor will they have to pay the new levy from 2023.

Those earning over £9,564 a year will see an increase in their National Insurance payments from April 2022 and will continue paying an extra 1.25% to the Health and Social Care Levy when it’s introduced in 2023.

How much an employee pays will be relative to how much they earn:

Annual Salary Current Yearly NI Payment NI Payment after 1.25% Increase Additional Amount Paid
£10,000 £52 £57 £5
£20,000 £1,252 £1,382 £130
£30,000 £2,452 £2,707 £255
£40,000 £3,652 £4,032 £380
£50,000 £4,852 £5,357 £505
£80,000 £5,479 £6,359 £880
£100,000 £5,878 £7,008 £1,130 

What Does This Mean for Employers?

Employers pay a percentage of Class 1 National Insurance for each employee, relative to how much they earn. With an increase of 1.25% per employee earning above the class 1 secondary threshold (£8,840), this will increase the financial burden on businesses and could act as a deterrent to hiring new staff when many businesses are still recovering from the impact of Coronavirus.

What About Self-Employed Workers?

Self-employed workers pay either class 2 or class 4 National Insurance, depending on their profits and are only taxed on income after business expenses. The 1.25% increase will still apply to those who are self-employed.

What If You Earn Dividends? 

Directors, sole traders, and anyone else who takes dividends from a company do not currently pay National Insurance but will see a similar tax increase of 1.25% to contribute to the new measure.

What Can You Do to Prepare?

In the short term, the rise in National Insurance is set to have the most impact on small businesses, as employing staff will become more expensive and many business owners are paid via dividend income which will also see an increase.

It’s therefore important to consider your finances and revisit your financial planning and budgeting to find out how you can plan for the increases when they come in and save on other costs.

Need a Hand?

If you’re looking for accountancy support, our professional team can offer advice and implementation of a range of services, from forecasting and budgeting, through to tax advice and planning.

To schedule a free, no-obligation consultation with one of our team, give us a call on 0117 379 0810 or fill out a contact form to discuss your requirements.

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