Simon Smith FCCA, explains the latest government tax changes aimed at sorting the NHS backlog and social care.
The government have set out plans for a £12bn-a-year tax rise that is designed to help fund health and social care. This move breaks the Conservative party's 2019 manifesto however, the state of the nation’s finances means tax rises have potentially been on the cards for quite some time.
National debt stands at £2.1trn and the UK continues to run an annual deficit of £304bn. Factor in the COVID-19 pandemic, and an already aging population has simply placed further upward pressure on the debt burden.
The move has therefore been justified as necessary to alleviate the backlog in the NHS and deal with the long term challenge of funding social care. The result is a tax increase, courtesy of the health and social care levy, that will bring the UK’s tax burden to its highest ever level, a peacetime record, at 42.4% of national income.
What is the health and social care levy?
The tax hike will take place from April 2022 in the form of a 1.25 percentage point increase in National Insurance contributions (NICs). This will apply to all payrolls and will then go back to the previous rate from April 2023, whereupon the new “health and social care levy” will be introduced at 1.25%.
In a break from the usual application of NICs, the new levy will be apply to working pensioners, dividend payments to shareholders, and employers' contributions. This means there will be a 1.25-point rise in dividend tax rates. Consequently after exceeding the dividend tax-free allowance of £2,000 that is in addition to £12,570 tax free allowance:
Basic-rate taxpayers will pay 8.75% tax on dividend income of £12,571 to £50,270
Higher-rate taxpayers will incur 33.75% on dividend income of £50,271 to £150,000
Additional-rate payers will pay 39.35% on dividend income over £150,000
According to the Institute of Fiscal Studies think tank, “the combined NICs rate on employment income (including employer NICs) will rise from 22.7% to 24.6%. By contrast, because the self-employed don’t pay employers NICs, their rate rises from 9% to 10.25%.”
A concern has to be where employers will find this money. You may, for example, end up absorbing this additional cost through:
Reduced profit margins, squeezing shareholders
Higher prices for end users and consumers
Lower wages for employees
Tax planning options to consider
Potential short term planning options include looking at extracting funds from companies through dividend payments, or directors bonuses, prior to April 2022. Alternatively, consider other methods of extracting funds from companies that do not attract NICs, or the new rate of dividend tax. These include:
The draw down of directors loans and;
Reviewing rents paid to directors for properties used in the business
Finally, consider the mix between dividend income versus capital gains. However, be warned that it has been mooted for some time that capital gains tax could come under review by the Chancellor, potentially in the upcoming Autumn Budget on 27 October 2021.
How health and social care funding will change
The new funding will mean that there is a new cap of £86,000 on the amount that anyone in England will need to spend on care costs in their lifetime as of October 2023. Of note, this doesn't include food and accommodation expenses in care homes!
People with assets of a value below £20,000 will not have use their savings, or extract money from the value of their home in order to fund their care.
Your main residence will count towards means testing for single people who are going into a care home. If however, you’re being cared for at a home, or if you have a partner, then your home is ignored in the means-testing.
Where the value of your assets are in the £20,000 - £100,000 range, you will receive some means-tested support.
As a comparison, currently if you have assets of a value greater than £23,250 then you have to pay your care costs in full, but that doesn't include accommodation.
This post was created on 15/09/2021 and updated on 28/09/2021.
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