To help fund the government’s social care plans NIC rates will increase by 1.25% and tax on dividends will increase by 1.25% from April 2022.
The government will introduce a UK-wide 1.25% health and social care levy based on NICs ringfenced to fund the investment in health and social care.
The levy will be effectively introduced from April 2022, when employer and employee class 1 NICs and class 4 NICs will increase by 1.25%. From April 2023, once HMRC’s systems are updated, the 1.25% levy will be formally separated out and will also apply to individuals working above state pension age, and NICs rates will return to their 2021/22 levels.
Revenues will be ringfenced for health and social care. Existing NIC reliefs for employers employing people under 21, apprentices under 25, certain veterans and for employers in freeports will apply to the levy.
The levy will be administered by HMRC and collected via PAYE and income tax self-assessment and will be legislated for shortly.
The government will also legislate in the next Finance Bill to increase the rates of dividend tax by 1.25% from April 2022.
Paul Johnson, director of the Institute for Fiscal Studies, said the announcements ‘constituted a Budget in all but name’. He noted that a levy of 1.25% on employee earnings and on employer wage costs (a 2.5% overall increase in the tax rate on earnings) will raise £14bn a year. ‘The £14bn of tax raised through a supposedly new tax, equivalent increases in spending on health and social care, and an announcement of spending totals for the next three years certainly constitute a major fiscal event,’ he said.
‘The extension of this levy to those over state pension age and to dividends is welcome, but this remains a tax which will be overwhelmingly borne by workers with very little coming from pensioners.’ Johnson said. ‘This continues a trend seen over many decades of the burden of tax being shifted towards earnings.
‘Both spending and tax will ratchet upwards over the next few years,’ he added. ‘Taxes will reach their highest sustained level in the UK. This was always going to be an inevitable consequence of ever-growing demands on health and social care, and would have happened eventually irrespective of the pandemic.’
Johnson thought it disappointing that the government had not found a better way to fund these spending increases. ‘A simple increase in income tax would have been preferable. But overall much needed reforms to social care are being introduced and unavoidable pressures on the NHS are being funded through a broad based and broadly progressive tax increase,’ Johnson said. ‘That is better than doing nothing.’
The CIOT expressed concern that the announcement increases the gap between the taxes from the employed and the self-employed. John Cullinane, director of public policy for the CIOT, said the move, in effect adding 1.25% to each figure, will not change that gap. ‘But that 3% differential is dwarfed by the 13.8% cost of employers’ NICs, levied on wages paid to employees but not on payments made to independent contractors. This will rise to, in effect, 15.05%, amounting to an increase in the total tax burden on employment of 2.5% of income compared to just 1.25% for self-employment.’
‘Avoidance of employer NICs is one of the main drivers of misclassification of individuals as self-employed rather than employed, i.e. false self-employment,’ Cullinane said. ‘This increase in the rate of employer NICs is likely to exacerbate this problem.’
Further, the CIOT noted that the move would increase the share of taxes that come from employment income overall, partly in order to help people retain and pass on their wealth. In other words, it is ‘taxing working age people more to protect the property wealth of older people. That is of course a legitimate policy choice for an elected government to make, if it is intended.’
Potentially, the move could set a precedent for including people of pensionable age within the scope of NICs, Cullinane said. ‘One of the most interesting aspects of today’s announcement is that the new levy (national insurance in all but name) will apply to pensioners, albeit limited to their employment income. The government will no doubt argue that this new levy is a special case but it is hard not to see this as setting a precedent making it easier to bring pensioner earnings within the full scope of national insurance at some point in the future.’
Cullinane, among others, observed that a new levy would bring added complexity to the tax system. ‘We note that the new health and social care levy, by being established separately from national insurance, and with slightly different rules, represents a further complication of the tax system. The initial year in which national insurance will be raised will enable HMRC to build the systems to collect the levy. It is hard to avoid seeing this as a diversion of scarce IT and other resources at a time when HMRC’s services to taxpayers and their agents are under severe strain. Presumably the government preferred to pay this price for the appearance of creating a new tax rather than of increasing rates of an existing one.’
Amanda Tickel, head of tax policy at Deloitte UK, said: ‘HMRC now needs to work out how to collect the levy from those above pension age who are not currently paying NI through the PAYE system, as well as looking at how ringfencing this tax to a particular cause will work in practice. This could be a complex and costly exercise and explains why some of the measures are deferred until 2023.’
To help fund the government’s social care plans NIC rates will increase by 1.25% and tax on dividends will increase by 1.25% from April 2022.
The government will introduce a UK-wide 1.25% health and social care levy based on NICs ringfenced to fund the investment in health and social care.
The levy will be effectively introduced from April 2022, when employer and employee class 1 NICs and class 4 NICs will increase by 1.25%. From April 2023, once HMRC’s systems are updated, the 1.25% levy will be formally separated out and will also apply to individuals working above state pension age, and NICs rates will return to their 2021/22 levels.
Revenues will be ringfenced for health and social care. Existing NIC reliefs for employers employing people under 21, apprentices under 25, certain veterans and for employers in freeports will apply to the levy.
The levy will be administered by HMRC and collected via PAYE and income tax self-assessment and will be legislated for shortly.
The government will also legislate in the next Finance Bill to increase the rates of dividend tax by 1.25% from April 2022.
Paul Johnson, director of the Institute for Fiscal Studies, said the announcements ‘constituted a Budget in all but name’. He noted that a levy of 1.25% on employee earnings and on employer wage costs (a 2.5% overall increase in the tax rate on earnings) will raise £14bn a year. ‘The £14bn of tax raised through a supposedly new tax, equivalent increases in spending on health and social care, and an announcement of spending totals for the next three years certainly constitute a major fiscal event,’ he said.
‘The extension of this levy to those over state pension age and to dividends is welcome, but this remains a tax which will be overwhelmingly borne by workers with very little coming from pensioners.’ Johnson said. ‘This continues a trend seen over many decades of the burden of tax being shifted towards earnings.
‘Both spending and tax will ratchet upwards over the next few years,’ he added. ‘Taxes will reach their highest sustained level in the UK. This was always going to be an inevitable consequence of ever-growing demands on health and social care, and would have happened eventually irrespective of the pandemic.’
Johnson thought it disappointing that the government had not found a better way to fund these spending increases. ‘A simple increase in income tax would have been preferable. But overall much needed reforms to social care are being introduced and unavoidable pressures on the NHS are being funded through a broad based and broadly progressive tax increase,’ Johnson said. ‘That is better than doing nothing.’
The CIOT expressed concern that the announcement increases the gap between the taxes from the employed and the self-employed. John Cullinane, director of public policy for the CIOT, said the move, in effect adding 1.25% to each figure, will not change that gap. ‘But that 3% differential is dwarfed by the 13.8% cost of employers’ NICs, levied on wages paid to employees but not on payments made to independent contractors. This will rise to, in effect, 15.05%, amounting to an increase in the total tax burden on employment of 2.5% of income compared to just 1.25% for self-employment.’
‘Avoidance of employer NICs is one of the main drivers of misclassification of individuals as self-employed rather than employed, i.e. false self-employment,’ Cullinane said. ‘This increase in the rate of employer NICs is likely to exacerbate this problem.’
Further, the CIOT noted that the move would increase the share of taxes that come from employment income overall, partly in order to help people retain and pass on their wealth. In other words, it is ‘taxing working age people more to protect the property wealth of older people. That is of course a legitimate policy choice for an elected government to make, if it is intended.’
Potentially, the move could set a precedent for including people of pensionable age within the scope of NICs, Cullinane said. ‘One of the most interesting aspects of today’s announcement is that the new levy (national insurance in all but name) will apply to pensioners, albeit limited to their employment income. The government will no doubt argue that this new levy is a special case but it is hard not to see this as setting a precedent making it easier to bring pensioner earnings within the full scope of national insurance at some point in the future.’
Cullinane, among others, observed that a new levy would bring added complexity to the tax system. ‘We note that the new health and social care levy, by being established separately from national insurance, and with slightly different rules, represents a further complication of the tax system. The initial year in which national insurance will be raised will enable HMRC to build the systems to collect the levy. It is hard to avoid seeing this as a diversion of scarce IT and other resources at a time when HMRC’s services to taxpayers and their agents are under severe strain. Presumably the government preferred to pay this price for the appearance of creating a new tax rather than of increasing rates of an existing one.’
Amanda Tickel, head of tax policy at Deloitte UK, said: ‘HMRC now needs to work out how to collect the levy from those above pension age who are not currently paying NI through the PAYE system, as well as looking at how ringfencing this tax to a particular cause will work in practice. This could be a complex and costly exercise and explains why some of the measures are deferred until 2023.’
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