In typical flamboyant style the Prime Minister delivered his very own mini-budget this week when he launched the new tax on income, the Health and Social Care Levy. Breezing over a broken election promise, to avoid tax increases, he justified the need to reduce the take-home pay for most UK taxpayers by citing the demands on government expenditure due to the COVID outbreak.
The 1.25% increase in National Insurance, morphing into the new Levy from April 2023, will impact all wage earners paying Class 1 NIC and the self-employed paying Class 4 NIC.
Employers may avoid any increase in their Class 1 employer contributions as this would still be sheltered behind the £4,000 Employment Allowance, but they will have to stump up for the increase to Class 1A contributions based on BiKs provided to employees.
Health and Social Care Levy
This Levy is a modern day attempt at a hypothecated tax. The idea is that proceeds will be directed at the NHS and social care budgets.
Cynically, it is another “soft” target for future tax increases. It is likely that this week’s announcement would have created more turmoil if the Prime Minister had announce a 1.25% increase in basic rate Income Tax.
It will be interesting to see if the transfer to the new 1.25% Levy from April 2023, will result in a return to present day levels of Class 1 and Class 4 contributions – as set out in policy paper on this topic – or will some of the increase be left as a permanent increase in National Insurance rates?
More red tape
When the Levy is introduced this will require changes in payroll software as the Levy will be shown as a separate deduction on payslips.
The Levy, as is National Insurance, remains a tax still administered UK wide, no regional variations. However, the Treasury will need to dole out an appropriate amount to the regional governments to feed into local health and social care budgets.
Effects on individuals
According to HMRC, the levy will be paid by employed and self-employed individuals earning above the Primary Threshold and Lower Profits Limit (£9,568 in 2021-22 tax year). In 2022-23 tax year an individual earning the median basic rate taxpayer’s income of £24,100 would be expected to pay an additional £180; and an individual earning the median higher rate taxpayer’s income of £67,100 would be expected to pay an additional £715.
A number of self-employed traders may also be encouraged to consider incorporation and adopting a low salary high dividend strategy to avoid Class 4 NIC charges.
Interestingly, individuals in receipt of property income as well as pensions income will be unaffected as NIC and the Levy are not applied to these income sources.
When the Levy is introduced, April 2023, wage earners aged above their State Pension age will be subject to this new tax charge.
A further tax increase for individuals will also kick in from April 2022, when the 1.25% increase will be applied to dividend income tax rates.
Told your clients yet?
Landmark distributed an update on the 1.25% changes as part of its Fee Builder services. If you haven’t taken a look at Fee Builder, we are offering free access to our Fee Builder resources and alerts, over the winter months, until 1 February 2022. If you sign up this month, you will have access to our client alert on this topic, issued this week.