FREQUENTLY ASKED BUSINESS QUESTION
I am the owner of a small business that operates through a limited company. I pay myself with a combination of salary and dividends. What is the new Health & Social Care levy, and will it affect me?
In an attempt to address chronic NHS underfunding the Government is expecting to raise an additional £12bn a year through the introduction of a new charge called the Health and Social Care Levy (HSCL).
Who will pay the new Health and Social Care Levy (HSCL)?
Although this is a separate tax, to enable its almost immediate introduction from April 2022, this levy will be collected through the National Insurance Scheme. Employees, employers and the self-employed will all pay 1.25% more in the pound for National Insurance from April 2022. Unlike National Insurance however, the health and social care levy will be paid by pensioners who are still in employment.
Furthermore, to create a level playing field between employees and those owner-managers who remunerate themselves through dividends, the Chancellor will increase dividend taxation by 1.25% which also increases dividend tax rates to:
- 8.75% for basic rate taxpayers
- 33.75% for higher rate taxpayers
- 39.35% for additional rate taxpayers.
Unlike national insurance which is not ringfenced for the provision of either public services or state pensions, the HSCL will be ringfenced specifically for health and social care costs and in this regard, from April 2023 it will become a tax in its own right and will be a separate line on employee payslips. HSCL will have the same starting threshold as National Insurance and it will be uncapped.
The Future of the Health and Social Care Levy (HSCL)
Experiences of countries that have introduced levies like this show that once introduced they tend to remain and indeed increase in succeeding years.
The Republic of Ireland introduced the Universal Social Charge (USC) during the noughties. It has now evolved into a tax with five separate bands. These bands typically account for a tax charge of over 10% for high earners which, when taken with Irish PRSI (National Insurance) of 4% and top rate of income tax of 40%, gives an effective top rate of tax in the Republic of Ireland of 54%. With the top rate of income tax in the UK at 45%, a banded national insurance system and now a new 1.5% levy, the UK is rapidly becoming a country of high personal taxation.
The corporation tax rate is increasing to 25% in 2023, so with the new Health and Social Care Levy of 1.25% for both employee and employer, as well as the increase in dividend tax rates by 1.25%, this means owner managers will need to review the way that they remunerate themselves as the gap is narrowing between remunerating oneself by pure salary versus a small salary and dividend.
Here to Help
The team at FPM are here to help with all your finance and tax queries. If you would like to find out more about how the health and social care levy will affect you, contact our Tax Team.