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How will the National Insurance and dividend tax increases affect me?
08 September 2021

Taxpayers face an increase in their National Insurance contributions (NICs) and dividend tax rates from 2022. To explain how this significant change may affect you, please use our helpful FAQ below:

How much is the National Insurance rate increasing?

The Health and Social Care Levy will see a 1.25 percentage point increase in NICs.

When will National Insurance rates increase?

The Health and Social Care Levy will be effectively introduced from April 2022. From 2023 it will then “be formally separated out” under new legislation.

Who will the increase affect?

The increase in NICs will initially affect everyone earning over the age of 16, but below state pension age, earning more than £184 per week through employment or with profits of £9,568 or more a year in self-employment.

The 1.25 percentage point increase also applies to employer contributions separately.

From 2023, the Health and Social Care Levy will also apply to individuals working above State Pension age as well. Currently, this group are not required to pay any NICs.

Are there any exemptions to the National Insurance increase?

The increase will not apply to Class 2 NICs, which is the flat rate paid by the Self-Employed with profits above the Small Profits Threshold (currently £6,515 per year) or Class 3 NICs.

This class of NIC is made up of voluntary contributions from taxpayers to fill in gaps in their contributions’ records to qualify for benefits.

How will the increase in the National Insurance rate affect my earnings?

The amount you earn will affect how much you pay to the Health and Social Care Levy.

Here are some examples of how much you will pay towards the levy depending on your earnings:

• £20,000 per year – £130
• £30,000 per year – £255
• £50,000 per year – £505
• £80,000 per year – £880
• £100,000 per year – £1,130

These amounts will be made in addition to your existing NICs.

The amounts and rates may differ for the self-employed.

Will the new health and social care reforms affect dividends?

Dividend tax rates will be increased by 1.25 percentage points to help fund the health and social care reforms. From April 2022, those in receipt of dividends will retain the £2,000 tax-free dividend allowance but will see 1.25 percentage points added to each rate of dividend tax above this.

How will changes to dividends tax affect ‘every day’ investors?

Shares held in ISAs are not subject to dividend tax, while the £2,000 tax-free dividend allowance combined with the personal tax-free allowance of £12,570 means that 60 per cent of individuals with dividend income outside of ISAs are not expected to pay any dividend tax and won’t be affected.

Nevertheless, many SME business owners are likely to find themselves caught by the change.

How much money will the increase to National Insurance and dividends tax raise?

The changes will raise an additional £12 billion each year.

Will the changes to health and social care affect my estate?

It will have little impact on a person’s estate from a tax perspective.

However, a new lifetime care cost cap of £86,000 and a new means-tested system will mean that from 2023, more complex or long-term care costs should be limited, potentially leaving more for future generations.

Be aware, that accommodation-related costs of care, i.e. those associated with daily living, such as food, energy bills and the property in which a person resides, will not count towards the cap.

The cap only covers the personal care elements, such as dressing, washing and eating, whether that is in a care home or within your home.

How will the new means-tested system work?

The new test for adult social care will come into effect in October 2023 based on a person’s income and savings, as follows:

Total assets above £100,000 – Full fees must be paid but the maximum that a person will have to pay over their lifetime towards personal care costs will be £86,000 as a result of the new cap.

If by contributing towards care costs, the value of a person’s remaining assets falls below £100,000, they are likely to be eligible for some financial support.

Total assets between £20,000 and £100,000 – Local authorities may fund some care costs. However, individuals will be expected to contribute towards the cost of their care from their income, but if that is not sufficient, they will contribute no more than 20 per cent of their chargeable assets per year.

If by contributing towards care costs, the value of a person’s remaining assets falls below £20,000, then they would continue to pay a contribution from their income but nothing further from their assets.

Total assets less than £20,000 – These individuals will not have to pay anything for their care from their assets. However, they may still need to make a contribution towards their care costs from their income.

Further details of the financial impact and rule surrounding dividend tax and National Insurance is expected in a future Budget and will be introduced in the next Finance Bill.

This change may have a significant impact on existing care and retirement plans, as well as your current remuneration strategy.

If you own or operate a business it may also have a substantial impact on your employment costs and payroll administration.

For advice on how this change may affect you, please speak to us.