Health and Social Care Levy and higher tax on dividends

In early September, a 1.25% Health and Social Care Levy was announced to help fund the NHS and Social Care, this wasn’t mentioned again in the recent Budget announcement.

We thought a reminder of how this levy will work would be helpful and consider areas in which it will impact owner managed business.

The new levy will apply with effect from 6 April 2022, initially as a 1.25% increase in National Insurance, payable by employees and the self-employed (where they are below state pension age) and employers irrespective of the age of the employee. From 6 April 2023, the Health and Social Care Levy will be a separate charge and will be charged on employment and self-employment income, including those over state pension age. The levy will also be payable by employers. National Insurance rates will then return to their current levels.

In addition, the rate of Income Tax on dividends is increasing by 1.25% with effect from 6 April 2022. This means the rates of tax on dividend income will be 8.75% (basic rate), 33.75% (higher rate) and 39.35% (additional rate).

As an owner-managed business, you will see from April 2023 an automatic 1.25% increase in your wage cost, which will be the additional 1.25% Employers National insurance liability, this should be factored into your cashflow workings. If you pay yourself a salary, then you and your employees will also personally suffer the 1.25% increase in the Employee National Insurance rate. Any income you take as dividends will also suffer the 1.25% levy.

It is likely that the section 455 tax charge levied for overdrawn loan accounts will follow suit and also increase to 33.75% to mirror the dividend tax rates from April 2022. This increase in rate will only apply for new loans taken out after 1 April 2022.

There’s not much you can do to avoid this levy, but remember for small businesses, the £4,000 annual Employment Allowance for NIC can be used against the new levy as well as NIC liabilities.

It would also be beneficial to review the benefit packages you offer to your employees to help manage your overall employment costs. For example, offering a salary sacrifice arrangement for staff pension contributions can offer significant efficiencies for both employers and employees. There are also other employee benefits which have a low taxable/NICable value such as electric vehicles that will be attractive to employees.

Depending on your circumstances, and where it is under your control, there could be merit in accelerating dividends and/or salary into the current tax year so they are taxed at the current rates. However, this will accelerate the payment of tax and could result in you being taxed at a higher marginal rate of tax so may not be beneficial. Where you are accelerating dividends, careful planning will be needed regarding future payments on account.

If you would like any assistance in planning for future changes in tax rates, please do contact us.