Carl Taylor Senior Consultant

While the Covid pandemic has put unprecedented pressure on the NHS, there has also been an underlying ever growing demand on health and social care. 

The government set out its new plan for reform of health and social care on 7th September, along with a corresponding plan for funding, including the introduction of a new Health and Social Care Levy.

What actually is the new levy, how will it affect you, and what action should you take as a result? 
We’ll set this out clearly in this article:

What is the new Health and Social Care Levy? It's a new tax that has been introduced to plug a funding gap that has arisen due to 3 main reasons:

  1. NHS backlog – initially, the additional funding will be directed to the NHS, to fund the significant backlog that has arisen due to the Covid pandemic
  2. Ever growing demands on health and social care 
  3. Cap on social care costs for individuals – the government have committed to introducing an £86k cap on the costs individuals have to contribute to their own care from October 2023, with the government funding this.  

How much is it?

In simple terms, it’s a 1.25% increase in National Insurance, and a 1.25% increase in dividend tax rates:

  Employees NI ↑ 1.25% Employers NI ↑ 1.25% Self Employed NI ↑ 1.25% Dividend Tax ↑ 1.25%
Basic rate 12% to 13.25% 13.8% to 15.05% 9% to 10.25% 7.5% to 8.75%
Higher rate   13.8% to 15.05%   32.5% to 33.75%

When will it be introduced?The new tax is going to be introduced as a temporary increase in national insurance and dividend tax for the 2022 – 23 tax year, with the funding from this year going directly to the NHS. From 2023 – 24 onwards the NI rates will revert to their original levels, and a new separate levy will be introduced, with the funding ringfenced to support UK health and social care bodies.

April 2022 – March 2023
Temporary increase to NI and dividend tax rates
April 2023 onwards
Health and social care levy introduced

From April 2023 onwards, the levy will also apply to those working over the state pension age.

How will it affect you?

The main impacts will be:
  • Increase in overall employment costs due to the increase in employers NI rates.  A small to medium sized business with an annual wage bill of £500k might see an increase in employment costs of around £5k - £6k.
  • Employees net pay will be reduced as a result of paying the additional levy  – examples as below:
Employee with £20k annual salary  £130 additional tax
Employee with £50k annual salary £505 additional tax
Employee with £80k annual salary  £880 additional tax
  • Additional cost to draw profits through dividends.  Typical additional cost for one individual taking dividends up to the basic rate band would be £444.
  • Additional tax for self-employed individuals
  • Ultimately a reduction in care costs to pay personally, due to the new £86k cap

What action should you take?•  Budget for the changes
Make sure you reflect the higher NI rates and new levy into your budgets from April 2022 onwards.

•  Use dividend allowances this tax year
Make sure you use your available dividend allowances before 5th April 2022, before the increase kicks in.

•  Review your profit extraction strategy
Make sure you’re using all avenues to tax efficiently extract profits from your company.  For example, you might need to consider using a Family Wellbeing Trust as part of your strategy, to pay for school fees tax efficiently.

Please note: This article is provided for information only and was correct as at time of writing (05/10/21). Any lists and details provided above are not exhaustive and are not intended to be full and complete guidance.  No action should be taken without consulting detailed legislation or seeking independent professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this article can be accepted.