National insurance and dividend tax rates are increasing by the addition of 1.25% from 6 April 2022 to fund reforms to social care and help the NHS recover from the impact of the pandemic.

The government is introducing a new health and social care (H&SC) levy to fund what it calls “the biggest catch-up programme in UK history”.

The HS&C levy will initially be part of National Insurance contributions and from April 2023 will apply as a separate levy.

What is the new levy?

From 6 April 2022 to 5 April 2023, National Insurance contribution rates will increase by the addition of 1.25% for employers, employees and the self-employed. The money raised will be spent on the NHS and social care in the UK.

For example:

  • the employees’ NIC rate in the year to 5 April 2022 is 12% on income of up to £50,270.This will increase to 13.5% in the year to 5 April 2023 – an increase of 12.5% of that 12%.
  • the 2% rate applied to an employee’s income over £50,270 will increase to 3.25% in the year to 5 April 2023 – an increase of 75% of that 2%.

The increase will not apply to people over state pension age in 2022/2023, but the H&SC levy will apply to them from April 2023 onwards.

From April 2023, the National Insurance increase will be shown separately on payslips as ‘Health & Social Care Levy’ and the money raised ring-fenced for social care.

Tax on dividends 

The rate of tax on dividends will also increase by the addition of 1.25% from April 2022 – to 8.75% basic rate, 33.75% higher rate taxpayers and 39.35% additional rate taxpayers. The £2,000 dividend income allowance will remain unchanged.

Planning for these changes

There may be tax planning opportunities for advancing salaries and dividends before the end of the tax year, and we would be happy to discuss these with you.

It is also worth considering how advancing income will affect how much you can contribute to your pension as contributions start reducing once your income exceeds £240,000.

If you would like to discuss any of the above issues with us, please contact your usual client handler (internal) Jill Springbett at jill.springbett@mgr.co.uk

Warning: The above is merely general guidance and should not be relied upon as formal advice. The advice we give to each client will depend on their specific circumstances. We suggest you take professional advice before taking any action in relation to the issues discussed above.