UK Approves Tax Rises To Fund Health And Social Care

One of the (many) effects of the Covid-19 pandemic has been to throw light on existing challenges for governments around the world. For the UK, one such challenge is funding the National Health Service and the related social care sector, supporting an ageing population with increasingly complex health needs. Coupled with the backlog in non-Covid related healthcare generated by the pandemic, it has long been speculated that the funding need was likely to mean tax rises.

On 7 September 2021 the UK government presented a paper to Parliament, entitled “Build Back Better: Our Plan for Health and Social Care”. This paper set out a proposed suite of tax increases, notable for the fact that the revenues are to be ring-fenced to fund the NHS and social care. Hypothecated taxes of this nature are unusual in the UK. Those tax increases were debated and approved by MPs on 8 September 2021. Certain of the measures have now been included in the Health and Social Care Levy Bill, which is being rushed through its various Parliamentary stages.

What will the tax increases look like?

To summarise the measures:

From April 2022 onwards, there will be a new UK-wide Health and Social Care Levy (the “Levy”). The Levy will be based on the existing National Insurance contributions (“NICs”) system, and charged at a rate of 1.25% of income within scope.

Initially, the Levy will be collected through a temporary 1.25% rise in the rate of certain NICs paid by employers, employees and the self-employed.

It will apply to the same groups (and amounts) to which existing Class 1 (primary and secondary), Class 1A, Class 1B and Class 4 NICs apply. It is worth noting that the Levy will therefore apply to the full suite of employment-related earnings and benefits to which NICs apply, rather than simply to cash payments.

It will be collected in the same way as NICs (i.e. through the Pay-As-You-Earn system for accounting for employment-related taxes, or through self-assessment tax returns for those who are self-employed).

In the meantime, HMRC’s systems will be updated to deal with the Levy as a tax distinct from NICs. From April 2023 onwards, the Levy will be shown as a separate item in tax calculations (although the basis for charging it and method of collecting it will remain the same) and NICs will return to their previous rates. At that stage the Levy will also begin to apply to individuals who work beyond the UK’s state pension age.

Existing NICs reliefs for employers will also apply to the Levy – for example, the exemptions from secondary class 1 NICs for the employment of under-21s and apprentices under the age of 25, to the extent that earnings do not exceed a specified threshold.

Alongside the Levy, the tax rates applicable to dividends received by individuals will also be raised by 1.25% from April 2022 onwards.

This change will mean that entrepreneurs who take profits from their own businesses as dividends will be caught by the tax rises, as well as those who hold shares purely for investment purposes.

The tax-free dividend allowance (and the ability to hold shares in an ISA, sheltering dividend income from UK tax) will be unaffected.

It is estimated that the changes as a package will raise an extra £12bn per year for the Treasury.

The intention behind basing the Levy on the NICs system appears to be to split the increased tax costs between individuals and businesses, with the government keen to stress that the lowest paid individuals and smallest businesses will see no increase in their tax burden. However, the Levy has come in for significant criticism – within Parliament and outside it – including on the basis that it effectively represents an increased tax on working. Many low-paid individuals and relatively small businesses will nevertheless still find themselves within scope.

The increased dividend tax rates might be seen as an attempt to broaden the net, to capture sources of wealth as well as income from working. However it is notable that certain specific areas (traditionally seen as the preserve of wealthier taxpayers) - such as capital gains, inheritance and property income – have been left untouched in this round of reforms.

What are the next steps?

The Health and Social Care Levy Bill deals only with the Levy. It is expected to complete the Parliamentary process and to receive Royal Assent soon. Legislation to enact the dividend tax rate increases is expected to be included in the forthcoming Finance Bill.