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1.25% tax increase to cover social care costs

The launch of a social care levy from 2022 will see all taxpayers facing a 1.25% tax charge under government plans, while dividend tax will also rise.

From next April the government will create a UK-wide, 1.25% health and social care levy on earned income, hypothecated in law to health and social care, with dividends rates increasing by the same amount. There will also be changes to the amount of savings people can retain when facing a move into care costs and a cap on total cost liability for anyone paying for care home accommodation and care.

The new tax is set to raise £12bn a year and marks a major departure from the Conservatives’ manifesto which committed to the triple lock on income tax, national insurance and VAT. 

Although it was originally floated as an increase in national insurance contributions (NICs), it will now be ringfenced purely for health and social care costs. The levy will be paid by businesses and individuals, including the self employed, from April 20222, and this will be extended in April 2023 to workers who continue to work after state pension age. Legislation will be passed to ensure that the charge is an independent tax, discrete from NICs and it will take a year for HMRC to update its systems to accommodate the levy as a separate charge, as opposed to a NICs’ increase on payslips.

This means that people earning £24,000, less than the average wage, would pay an additional £260 a year for the levy, which will be clearly indicated as the social levy on pay slips. Anyone earning less than £9,680 will not have to pay the levy.

A typical higher rate taxpayer earning £67,100 will contribute £715. Additional rate taxpayers make up just 2% of individuals affected but will contribute nearly 20% of the revenue raised from individuals.

The dividend tax will be legislated in the next Finance Bill and the government said that additional and higher rate taxpayers are expected to contribute over 70%t of the revenue from this increase in 2022-23.

In a speech in parliament, the prime minister Boris Johnson said: ‘We will fix the long-term problems of health and social care. From next April we will create a health and social care levy of 1.25% and the dividend rate will rise by the same amount with the levy going to social care across the whole of the UK.’

He added: ‘We need reform and change, we need to build back better. When Covid started, 30,000 beds in hospitals were used by people waiting for care home beds. Governments have ducked this problem for decades. There can be no more dither and delay, and we cannot rely on insurance as the premiums would be too high.’

Johnson said the plan to create a specific levy as opposed to raising income tax, for example, was to ensure that the charge was spread across individuals and businesses.

‘Our new levy will share the cost between individuals and businesses, and everyone will contribute according to their means, including those above state pension age, so those who earn more those who earn more will pay more,’ said Johnson.

‘Income tax is not paid by businesses so the whole burden would rest on individuals. The new levy will fall on businesses and individuals. And the highest earners will pay the majority.

‘And because we are also increasing dividends tax rates we will be asking better-off business owners and investors to make a fair contribution too.’

He stressed that the highest earning 14% will pay around half the revenues, no-one earning less than £9,568 will pay the levy, and the majority of small businesses will be exempt, with 40 per cent of all businesses paying nothing at all.

This will raise an estimated £12bn a year, with money from the levy going directly to health and social care across the whole of the UK.

Existing NICs reliefs to support employers will apply to the Levy. Companies employing apprentices under the age of 25, all people under the age of 21, veterans and employers in freeports will not pay the levy for these employees as long as their yearly gross earnings are less than £50,270, or £25,000 for new freeport employees.

James Ross, partner at law firm McDermott Will & Emery, said: ‘As far as individuals are concerned, the government has made some attempt to address the inequities of increased taxation on earned income by increasing the rate of tax on dividends (in order to reduce the benefits of routing income through service companies). 

‘This, however, introduces asymmetries elsewhere in the tax system. The top rate of tax on dividends will increase to 39.35% – nearly twice the 20% top rate of tax on capital gain. Individuals who hold material shareholdings in trading or investment companies will have clear incentives to try and structure their returns as capital gains rather than dividend income.’

Care cost cap

There will also be wide-ranging changes to the costs paid by people facing residential care. The PM set out plans for a limit on what people can be expected to pay. From April 2023, no-one starting care will have to pay more than £86,000 towards their care.

Currently, anyone in England with assets over £23,250 must pay for their care in full.

The savings limit will also be increased to £20,000 from the current £14,000, which means that they will not have to make any contribution to care costs.

Meanwhile anyone with assets between £20,000 and £100,000 will be eligible for some means-tested support. This new upper capital limit of £100,000 is more than four times the current limit. However, if a person’s total assets are over £100,000, full fees must be paid.

The supporting document primarily sets out ongoing issues with NHS backlogs and plans to address this, but also gives brief details on how the new asset limits will work.

When these reforms are implemented, around 150,000 people will directly benefit at any one point in time.

A white paper on integrated health and social care will be released later this year setting out more detailed plans.

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