Finally, the Government has set out plans to tackle social care. A new tax will raise the necessary funding. The health and social care levy will generate an extra £12billion a year. Here’s what we know so far about the impact of the new ‘care tax’.
Increase in NIC
Fundamentally, most people will pay more in National Insurance Contributions (NIC). From 6 April 2022 all NIC rates will rise by 1.25%. So will income tax on dividends.
Older workers are affected
Working taxpayers over state pension age are affected. From 6 April 2023 they will have to pay the levy. The self-employed will pay tax at 1.25% on annual profits over £9,568. Employees don’t pay primary class 1 NICs when they reach state pension age. However, employers pay secondary class 1 NICs on these older workers’ salaries. Unless, like ex-forces veterans, they are exempt. Employees over state pension age will pay the ‘care tax’ on all earnings above £9,568 a year.
The upper earning limit of £50,570 aligns with the income tax higher rate threshold. Both are frozen until 6 April 2026. We wait to see whether the primary (£9,568) and secondary (£8,840) thresholds will also remain at those levels for that period.
Impact of the new ‘care tax’ on NMW earners
The levy could impact people earning the minimum wage (£9.50 per hour). They pay class 1 NIC if they work more than 17.4 hours per week. Plus, income tax if they work more than 25.44 hours per week.
Class 2 and 3 NIC payers
There’s good news some taxpayers. Those who only pay class 2 or class 3 NIC. The ‘care tax’ will not apply to them.
Tax bills for partnerships
2022/23 is the transition period. It covers the current year basis and the proposed tax year basis to apply from 6 April 2023. Typically, the accounts year end is 31 March or 5 April. This is not the case for around 33% of partnerships. It means paying tax on more than 12 months of profits in 2022/23. Consequently, these partnerships face major tax and class 4 NIC bills in that year.
Dividend tax rise
The Government’s plans also impact dividend tax. The basic rate increases from 7.5% in 2021/22 to 8.75% in 2022/23. The higher rate band moves from 32.5% to 33.75%. The additional rate band rises to 39.35% from 38.1%. Dividends on investments within ISAs do not attract dividend tax.
What about the impact of the new ‘care tax’ on the dividend allowance? Will it remain at £2,000 or be reduced in 2022/23? We await an update.
Far reaching impact
Certainly, the health and social care levy will impact far and wide. Will it be enough to resolve the social care crisis? We expect more information about the Government’s plan in due course.