The new Health and Social Care Levy explained

The government's plan to tackle the NHS backlog and reform social care funding relies on a new, UK-wide 1.25% Health and Social Care Levy. This represents a significant increase in the tax burden for workers, employers, and investors.

The levy will be introduced in two stages, starting in April 2022, and will require adjustments to payroll systems and remuneration strategies.

Stage 1: The National Insurance increase (2022/23)

For the 2022/23 tax year, the levy will be implemented as a temporary 1.25% increase to the main and additional rates of Class 1 (employee and employer), Class 1A, Class 1B, and Class 4 (self-employed) National Insurance contributions.

This means employees will see their NI deductions increase, and employers will see their payroll costs rise. Existing NI reliefs, such as the Employment Allowance, will continue to apply against the increased rates.

Stage 2: The separate Levy (from 2023/24)

From April 2023, National Insurance rates will return to their previous levels, and the 1.25% charge will be separated out as a distinct 'Health and Social Care Levy' on payslips. Crucially, at this point, the levy will also be applied to individuals working above the State Pension age, who currently do not pay employee National Insurance.

The impact on dividend income

To ensure the burden is shared by those who generate income through investments or their own limited companies, the government is also increasing the rates of dividend tax by 1.25% from April 2022. The dividend ordinary rate will rise to 8.75%, the upper rate to 33.75%, and the additional rate to 39.35%. The £2,000 tax-free dividend allowance remains unchanged for now, but this increase makes extracting profits via dividends slightly more expensive.