Social Care Levy 

The Prime Minister has confirmed the launch of a new social care levy from 2022 which will see almost all taxpayers facing a 1.25% increase in costs – breaking the Conservative’s manifesto pledge on raising taxes.

What’s happening?

From 1 April 2022 there will be a temporary 1.25% increase in the following types of National Insurance:

  • Class 1 primary, employee (from 12% and 2% to 13.25% and 3.25%)
  • Class 4, self employed (from 9% and 2% to 10.25% and 3.25%)
  • Class 1 secondary, employer (from 13.8% to 15.05%)
  • Class 1A and Class 1B, employer (from 13.8% to 15.05%)

From 1 April 2023 the above rates will come back now to their previous level but a separate ‘health and social care levy’ of 1.25% will be raised.

Alongside this levy from April 2022 dividend tax rates will increase by 1.25% as follows:

  • Basic rate: 7.5% to 8.75%
  • Higher rate: 32.5% to 33.75%
  • Top rate: 38.1% to 39.35%

What can I do to avoid this?

Frustratingly there is little practical action that will be possible to avoid these increases.

Director’s drawing dividends could consider whether they can reduce their yearly drawings and push profits for drawing at the closure or sale of their business to be subject to capital gains tax instead of income tax, however there is some talk of possible changes to capital gains tax in the not too distance future which would make such planning potentially unfruitful.

Tax efficient remuneration

Tax efficient remuneration strategies will not be affected by this change in so much as a low salary and higher dividend package will still be the most tax efficient extraction from a limited company. However, the tax rise and levy will cost approximately £480 overall a year for directors who bring their income up to their basic rate allowance each year.

Who won’t be affected?

Individuals above State Pension age will not be affected by the temporary increase to National Insurance contributions for the 2022 to 2023 tax year but will be liable to pay the levy from April 2023.

The current plans will affect employers, employees, the self-employed and the majority of those in receipt of dividends exceeding £2,000 a year. Landlords however will not have any increase in their taxes according to the latest information from HM Revenue and Customs.

I’m worried about this!

If you have any concerns about how these changes may affect you and your business then please get in touch to discuss how LK and Associates can assist you.