The government has announced an extra tax to fund social care in England and to help the NHS recover after the pandemic.
There will be a 1.25% rise in National Insurance Contributions (NICs) from April 2022 paid by both employers and workers and will then become a separate tax on earned income from 2023 – calculated in the same way as NIC and appearing on an employee’s payslip. Note that the 1.25% increase applies to the Class 4 contributions paid by the self-employed on their profits as well as the Class 1 contributions paid by employees increasing the rates to 10.25% and 13.25%. The employers’ Class 1 rate will increase from 12.8% to 14.05% however many small businesses are able to set off a £4,000 employment allowance against their employers’ NIC liability.
Many workers operating through personal service companies to whom the new “off-payroll” working rules apply will also be caught by the proposed measures.
The 1.25% additional levy doesn’t just apply to national insurance contributions, it is proposed that the income from share dividends, earned by those who own shares in companies, will also see a 1.25% tax increase. This would mean that after the £2,000 tax-free dividend allowance the rate of tax would be 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers, and 39.35% for those with income in excess of £150,000 a year.
Note that those above State Pension Age who are earning or self-employed will start paying NIC and the new Health and Social Care Levy from 2023/24.
Details of the proposals are set out in the following document: 6.7688_CO_Command paper cover_060921 (publishing.service.gov.uk)