Health and Social Care Levy

Boris Johnson has announced a new 1.25% health and social care levy on earned income, with dividend rates increasing by the same amount. He said the levy would fix the long term problems of health and social care that have been “cruelly exposed by Covid”.

The increase in national insurance comes into effect in April 2022 and is expected to raise almost £36 billion for health and social care over the next three years.

The 1.25% health and social care levy will be a separate tax to income tax and national insurance.

The key features are:

Funding the Health and Social Care Levy

This will be shared between individuals and businesses, but the Prime minister explained that “everyone will contribute according to their means, including those above state pension age”. He added: “Those who earn more, will pay more. Because we’re increasing the dividends tax rate we will be asking better off business owners and investors to make a fair contribution too.”

The PM confirmed that the highest earning 14% will pay around half the revenues and no one earning less than £9,568 will pay. He claimed that 40% of all businesses will pay nothing at all. The NIC increase is on both employers and employees, with the total increase being 2.5%.

Why Increase NICs not Income Tax?

The prime minister defended opting for the national insurance option., saying “Income tax isn’t paid by businesses so the whole burden would fall on individuals, roughly doubling the amount that the basic taxpayer could come to expect and the total revenue from CGT amounts to less than £9bn this year.”

However, it will increase employment costs for businesses and there is concern that some employers will reduce pay rises to compensate for the NIC increase.

The increase will also hit hard-pressed directors of small companies who have been largely unsupported during the pandemic.