National Insurance and Dividend Tax to rise by 1.25% to fund social care reform and NHS pandemic bac

The Government has confirmed that it will raise the National Insurance (NI) tax by 1.25 per cent from April 2022 to help aid in the ever-increasing backlog of NHS waiting lists and social care costs following the COVID crisis. Dividend tax rates will also rise by the same amount starting from April 2022. 

Addressing MPs, Prime Minister Boris Johnson said:

"We will create a new UK-wide 1.25% Health and Social Care Levy on earned income, with dividend rates increasing by the same amount […] Those who earn more will pay more, and because we are increasing the dividend tax rate, we will be asking better-off business owners and investors to contribute more".

The announcement comes ahead of Rishi Sunak’s spending review for 2022-2023 that will be revealed alongside the Autumn Budget on the 27th October 2021.

Who will pay? How much will this cost me?

Employees pay National Insurance on their wages, the self-employed pay National Insurance on their profits, so both of these groups will be affected - and employers will pay extra National Insurance contributions for all staff.

From 2022 to 2023, it is estimated that the average basic-rate taxpayer earning around £24,100 will have to pay in the vicinity of £180 more in National Insurance. For typical higher income bracket workers earning £67,100, this figure may rise as high as £715. Those earning under the £9,568 income bracket will not be affected by these changes as they do not have to pay National Insurance. 

The director of the Institute for Fiscal Studies, Paul Johnson, responded to the changes: “pensioners will pay next to nothing for this social care package,” and that it will be “overwhelmingly paid by working age employees”. 

Boris Johnson maintained that the tax hike was a necessary answer to the ever-increasing institutional pressures from the pandemic. He said,

“After all the extraordinary actions that have been taken to protect lives and livelihoods over the last 18 months, this is the right, the reasonable and fair approach".

In terms of care costs, the Government has confirmed that from October 2023, anyone in England with assets below £20,000 will not have their care costs charged from their savings, although depending on the level of income they receive they may need to contribute from their income. Those with assets between £20,000 and £100,000 will still receive support but will be expected to contribute. For those with £100,000 or more in assets however, no state support will be offered in this area.

How much will be raised? Where are these funds going?

The tax hike is expected to raise £36bn over the next three years, with £12bn being raised over the next 12 months. 

The primary purpose of raising these funds, Boris Johnson has said, is to further fund the NHS during the pandemic and to help aid in social care reform by capping the amount any individual spends on their care at £86,000. Any further costs are to be footed by local councils. 

The reform is a response to the rising societal and socio-economic pressures of the UK’s ageing population. Hundreds of thousands of people are struggling to afford the care they need, and the pandemic is only further exacerbating these existing issues. 

Before this change, the arrangement was that anyone with assets totalling more than £23,250 had to fund their care in full until their capital reduced to that level.

"Wherever you live, whatever your age, your income or condition, from October 2023, no-one starting care will pay more than £86,000 over their lifetime," the Prime Minister said. 

 

For more information about taxes and how best to manage them going forward, have a look at our page on tax planning services.

Please note: the Financial Conduct Authority does not regulate tax advice.

 

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