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Written by Wesleyan

New health and social care levy

financial planning
investments
doctors
4 min read

Plans to tackle Covid backlogs, reform adult social care and bring the health and social care system closer together on a long term, sustainable footing were announced in September. £36 billion will be invested in the health and care system over the next three years, to provide long-term support.

From April 2022, the Government will introduce a UK-wide 1.25% Health and Social Care Levy, funded through National Insurance Contributions (NICs).

All working adults, including those over the State Pension age, will pay the Levy and rates of dividend tax will also increase by 1.25%, to help fund this. Individuals above State Pension age will not be affected by the temporary increase to NICs for the 2022/23 tax year, but will be liable to pay the Levy from April 2023.

Every individual will contribute according to their means, with the highest earning 14% of people paying around half the revenues. Employers will also be asked to contribute, so the costs are more widely shared. Changes will also be made on how care costs are funded.

Comment

Following the announcement, Linda Wallace, Director of Wesleyan Financial Services, said:

“It is hugely welcome to see extra money being made available to those in the NHS and social care sector – individuals who have worked tirelessly in extremely challenging conditions to provide vital services.

“Any rise in tax puts pressure on people’s finances and some might be facing hard choices in how they allocate and spend their hard-earned funds. This won’t remove the need, however, to ensure that they’re still able to do things like saving for emergencies and bolstering their retirement plans. Seeking advice and support on how to balance factors like these will be key.

“The new lifetime cap on care costs will also help individuals better anticipate and ultimately prepare for, the costs of any care they might need in the future. For too long, this has been an open-ended system, creating anxiety and uncertainty in the financial planning process. Today’s clarity creates a platform that we expect will prompt and facilitate vital discussions, around long-term care needs.”

Tax implications examined

The Levy will be introduced from April 2022, when NICs for working age employees, self-employed and employers will increase by 1.25% and added to the existing NHS allocation. From April 2023, the Levy will be formally separated out and will also apply to individuals working above State Pension age, with NICs rates returning to their 2021-22 levels.

 
Employee Main / Higher Rate
Employer
Self-employed Main / Higher
2021/22
12% / 2%
13.8%
9% / 2%
2022/23
13.25% / 3.25%
15.05%
10.25% / 3.25%
Source: HM Government ‘Build Back Better - Our Plan for Social Care’ - Sept 2021.

Impact on employees

Increases in NICs are likely to be as follows:

Annual Salary
Current yearly payment
Additional yearly payment
£20,000
£1,251
+£130
£30,000
£2,451
+£255
£50,000
£4,851
+£505
£80,000
£5,479
+£880
£100,000
£5,878
+£1,130
Source: BBC - Sept 2021.

Impact on employers

Existing NICs reliefs to support employers will apply to the Levy. Those employing people under 21, apprentices under the age of 25 and veterans, will not pay the Levy for these, if their yearly gross earnings are less than £50,270. The Levy will be administered by HMRC and collected by the current channels for NICs – Pay As You Earn and Income Tax Self-Assessment.

The Government recognises the need to support the smallest employers and the Employment Allowance, which discounts the smallest businesses’ employer NICs bills by up to £4,000, will also apply to the Levy. This means that around 40% of organisations will not be affected by the Levy. The next 40% of organisations will face an average increase of £450 per year. 70% of the money raised from businesses will come from the largest 1% of organisations, with at least 250 employees.

Increasing dividend tax rates

Dividend tax is paid by individuals who receive dividend income from shares, which is not subject to NICs or the Levy. The Government will increase the rates of dividend tax by 1.25% from April 2022. Additional and higher rate taxpayers are expected to contribute over 70% of the revenue from this increase in 2022-23. Shares held in ISAs are not subject to dividend tax. Due to the £2,000 tax-free dividend allowance and personal allowance, around 60% of individuals with dividend income outside of ISAs are not expected to pay any dividend tax or be affected by this change in 2022-23.

The rates are as follows:

 
Basic rate
Higher rate
Additional rate
2021/22
7.5%
32.5%
38.1%
2022/23
8.75%
33.75%
39.35%
Source: HM Government ‘Build Back Better - Our Plan for Social Care’ - Sept 2021.

Funding of care costs

Currently, around one in seven must pay over £100,000 for care, but based on the new Levy, from October 2023, no one in England will now have to pay more than £86,000 in care costs over their lifetime. This will apply regardless of where they live, how old they are, what their condition is, or how much they happen to earn. At the same time, the Government will support those without savings, with the state covering all care costs for anyone with assets under £20,000. Anyone with assets between £20,000 and £100,000, will be expected to contribute to the cost of their care, but will also receive state support which will be means-tested.

The new £100,000 limit is over four times higher than the current limit of £23,250, meaning more people will be eligible for support than currently. The overall system will ensure those who fund their own care do not pay more than state-funded individuals for the equivalent care. The NHS and the social care system in England will be brought closer together, with a white paper published later in 2021. While Scotland, Wales and Northern Ireland have their own systems, steps will be taken to address this also.

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