NICs & Tax increase (aka the Health and Social Care Levy)
*Updated following Chancellor's Spring Statement on 23 March 2022.
The government has announced that to help raise an extra £12bn a year for health and social care following the pandemic, all rates of national insurance contributions and income tax on dividends will increase by 1.25 percentage points from 6 April 2022.
To soften the blow, the Chancellor announced, in his Spring Statement, that from July 2022 the Primary NIC threshold will rise to £12,570 in line with the Personal Allowance and the Lower Profits Limit for self-employed Class 4 NICs will rise to £11,908 (rising to £12,570 from 6 April 2023).
The Health and Social Care Levy Bill makes it clear that the increase in NIC will only apply for one tax year: 2022/23, as from 6 April 2023 the Health and Social Care (HSC) Levy will replace the top 1.25% of NIC in all cases.
This increase in rates will be rebranded as the “health and social care levy” from April 2023 and de-coupled from its NIC parent at that time, allowing the government to widen its scope to include working taxpayers who are over state pension age.
The technical annex to the proposal for the health and social care levy says the NIC rates will revert to their previous levels from April 2023, but the monetary effect for each taxpayer will be the same. Only the names of the taxes are changed.
The Chancellor also said he would take a penny off the basic rate of income tax, from 20pc to 19pc, by the end of this parliament (some time in 2024).
We now have confirmation that the planned increase in the Class 1 Primary Threshold to £12,570 will also apply to the Lower Profits Limit from 6 April 2023. The threshold will be raised to £11,908 for 2022/23.
Self-employed individuals who are over the state pension age on 6 April 2023, will pay the health and social care tax at 1.25% on profits over £12,570 per year.
Employees currently don’t pay Primary Class 1 NIC when they reach state pension age, but employers do pay Secondary Class 1 NIC on the salary of these older workers, unless they fall under one of the exemptions for Secondary Class 1; such as for ex-forces veterans.
However, the state pension age restriction for Primary Class 1 and Class 4 NIC will not apply to the HSC levy (clause 3(3)). This means that new HSC tax of 1.25% will be payable by pensioners who are still working as employees or are self-employed after 5 April 2023, if they earn over the Primary Threshold of £12,570 per year.
Class 1 NIC
|Class 1 Primary (employee)||2022/23||2021/22|
|0–£9,880* (*£12,570 from July)||0%||0%|
|£9,880*–£50,270 (*£12,570 from July)||13.25%||12%|
|Class 1 secondary (employer)|
The upper earning limit of £50,570 is aligned with the income tax higher rate threshold, both of which will be frozen at that level until 6 April 2026, as announced in the Budget on 3 March 2021.
We don’t know whether the new Primary Threshold (£12,570) and the Secondary Threshold (£9,100) will also be held at those levels for that period.
Class 4 NIC
Classes 2 and 3 NIC
These classes of NIC are charged at flat monetary amounts per week, and the government has confirmed that the increase in NIC which will be transformed into the health and social care tax, will not apply to these classes of NIC. Thus, the care tax will not apply to those taxpayers who are only paying Class 2 or Class 3 NIC.
From 2022/23 the threshold for paying class 2 NIC will be aligned with that for paying Class 4 NIC: £11,908 for 2022/23, then £12,570 for 2023/24. However, this large step up could leave many low-profit traders with no national insurance contributions for many tax years.
To solve this problem, from 6 April 2022 self-employed traders with profits below the lower profits limit will be treated as if they had paid class 2 NIC, but in fact they will make no actual NICs payment.
The Government has already published a draft National Insurance (Increase of Thresholds) Bill 2022, which will bring these changes into effect. This Bill will be fast-tracked through Parliament.
Bill is a partner in the Payer Law partnership, taking a profit share of £150,000 per year. The Class 4 NIC payable on Bill’s income from the partnership will be:
|Class 4 NIC||£|
|Total class 4 NIC||5,657.78|
|Class 4 NIC||£|
£11,908–£50,270 (July to Mar)
Total class 4
The Class 4 NIC due on Bill’s profit share has increased by £1,515.56 in 2022/23. That’s an increase of nearly 27%.
The 2022/23 tax year is also the transition period between the current year basis and the proposed tax year basis due to apply from 6 April 2023. The 33% of partnerships that do not already draw up accounts to 31 March or 5 April will have more than 12 months of profits taxed in 2022/23, leading to bumper tax and Class 4 NIC bills in that year.
There are three categories of employee where the employer can currently pay a zero rate of secondary Class 1 NIC on the employee’s pay up to the secondary threshold (£50,270 pa). Those categories are:
- Anyone aged under 21
- Apprentices aged under 25
- Ex-forces personnel in their first civilian role for up to 12 months
In addition, from 6 April 2022 a zero rate of secondary Class 1 NIC will be available on employees’ wages who work for least 60% of their time at a Freeport tax site. This zero-rate will apply up to a new secondary threshold which is set at £25,000 per year.
The HSC levy won’t be payable by the employer on employees’ wages where the zero rate of secondary class 1 NIC applies (clause 1(5)).
The Chancellor also announced, in his Spring Statement, that he will increase the Employment Allowance to £5,000 from April 2022.
HMRC has stated that the annual employment allowance (now £5,000) can be set against the increased secondary class 1 NIC for 2022/23 and, we currently understand, the employment allowance will also be available to set against the HSC levy from April 2023. Eligible employers are, broadly, businesses or charities whose employers' Class 1 NIC liabilities were less than £100,000 in the previous tax year. Other Group and de minimis state aid restrictions apply.
Note that the 1.25% NIC increase for 2022/23 will count towards the £100,000 Class 1 NIC liability cap for EA but wouldn't affect eligibility for EA relief until 2023/24, as the cap refers to the previous tax year when considering EA. When the NIC increase is de-coupled in 2023/24 and becomes the Health and Social Care levy it seems likely it will still count towards the £100,000 limit.
The Employment Allowance is not mentioned in the Health and Social Care Levy Bill 2021, but relief may be provided by regulations made under clause 4(2) after the Act is passed.
The rates of income tax on dividends received will increase as shown in the dividend tax table below. Dividends received on investments held within ISAs are not subject to the dividend tax.
|Basic rate band||8.75%||7.5%|
|Higher rate band||33.75%||32.5%|
|Additional rate band||39.35%||38.1%|
The dividend allowance will remain at the same level in 2022/23 (£2,000).
Pip is the director and sole shareholder of Squeeze Ltd, and is the only employee. He takes a salary of £12,570, and dividends of £37,700. Any remaining profits are either left in the company or paid as an employer’s contribution into his pension fund.
The income tax and NIC payable on Pip’s income from the company will be:
|Class 1 NIC–employee||£|
|Class 1 NIC – employer|
|Total tax and NIC||3,552.48|
|Class 1 NIC – employee||£|
£9,880–£12,570 (Apr to June)
£12,570–£12,570 (July to Mar)
|Class 1 NIC – employer|
|Total tax and NIC||3,735.09|
The income tax and class 1 NIC due on Pip’s income has increased by £182.61 in 2022/23. That’s an increase of nearly 5%, which Pip will surely notice but not as much as the 13% increase we were expecting before the chancellor's statement.
The Employer’s Class 1 is tax deductible for Squeeze Ltd, but Pip also needs to budget for an increase in Corporation Tax from 1 April 2023, when the main rate jumps from 19% to 25% of profits over £50,000, subject to tapering up to £250,000.
For UK companies, one of the biggest taxes to be planning ahead for is the increase to corporation tax. The new rate is confirmed to be effective from 1 April 2023. The super-deduction of 130% for capital expenditure will remain in place for this period.
Currently all companies, regardless of the size of their profits, suffer corporation tax at the rate of 19%. It is an historically low rate and it will continue to be effective until 31 March 2023.
After this date, a new higher rate comes into effect for companies with profits over £50,000. They will face a corporation tax rate of 25% – a significant increase of nearly 32%.
All companies with profits below £50,000 will continue paying the 19% rate of corporation tax.
Depending on the circumstances, if a company’s profits lie between £50,000 and £250,000, it may be possible to claim some marginal tax relief to reduce the 25% rate. This can still apply if the company’s accounting period is less than 12 months, or if there are associate companies.
Calculating marginal relief on corporation tax
Although marginal relief helps to reduce the total corporation tax payable where a company’s profits fall between £50,000 and £250,000, the way in which it is calculated is based on a complex formula that has the effect of increasing the rate of corporation tax payable on profits falling within the marginal range, to a rate that is higher than 25%.
Effectively, the full amount of corporation tax at the rate of 25% is calculated before marginal relief is deducted. The marginal relief calculations are based on offsetting ‘augmented profits’ against the total taxable profits. According to HMRC, ‘augmented profits’ are the company’s total taxable profits plus exempt distributions from non-group companies. These include dividends, distribution of assets or amounts treated as a distribution on the transfer of assets or liabilities or the repayment of share capital.
Example 1: Marginal relief calculation
The accounts for Overtaxed Ltd show total profits (taxable and augmented profits) of £190,000 for the year to 31 March 2024. The company has no associated companies. Marginal relief applies because profits fall between £50,000 and £250,000.
Calculations show that Overtaxed Ltd is entitled to £900 of marginal relief. This has the effect of slightly reducing the rate of corporation tax payable on all profits by 0.48% to 24.53%.
Therefore, instead of paying 25% on profits of £190,000 (£47,500), the company pays 24.53% of £190,000 (£46,600).
However, if profits were £50,000 the corporation tax payable would be £9,500, at 19%, therefore the corporation tax on profits exceeding £50,000 (£140,000) is £37,100, an effective rate of 26.5%.
Depending on profit levels, it may be worth considering planning opportunities to reduce profits to below the marginal rate limit, such as advancing the purchase of equipment or making pension contributions.
Impact of associated companies on corporation tax
Where a company has multiple associated companies, the upper and lower profit limits for corporation tax purposes will reduce accordingly.
Broadly, a company is an ‘associated company’ of another company if one of the two has control of the other, or both are under the control of the same person or persons (CTA10/S25 (4)). Tax residence is disregarded. Note that; an associated company which has not carried on any trade or business at any time during the accounting period is disregarded
The limits are divided by the number of companies associated. The table below shows how the taxable profit limits for companies with up to three associated companies are adjusted.
|Associated companies||Upper profits limit||Lower profits limit|
For example, if Overtaxed Ltd in the earlier scenario had one associated company, its profit limits would change from £50,000 up to £250,000 to become £25,000 up to £125,000. Since its taxable profits are £190,000, it will pay the full 25% corporation tax rate.
If a company’s accounting period spans the 1 April 2023 new rate start date, profits will be apportioned between those falling within the financial year 2022, which are taxed at 19%, and those falling within the financial year 2023. For the profits in the new tax rate period, the actual rate payable will be dependent on what the upper and lower profit limits are.
Knock-on effect for loans to participators
Where a director/participator in a close company borrows from that company (eg overdrawn director’s account) and doesn’t repay the loan by the due date of the corporation tax (9 months and 1 day after the company's financial year-end), a section 455 charge is levied on the outstanding loan. This charge takes the form of additional Corporation Tax payable to HMRC but it can be reclaimed when the director/participator repays the loan using cash, salary, pension or dividend (subject to specific rules).
The section 455 CT charge for 2021/22 was 32.5% of the loan outstanding and this will increase to 33.75% in line with the higher rate of dividend tax from 6 April 2022.
"I can't remember so many tax and NIC changes in recent years impacting such a broad variety of day-to-day tax planning. Employers and small business owners will need to be fully aware of all the different changes coming through in order to prepare and plan for them effectively. As ever, we are keeping our clients informed and are very happy to discuss any concerns or questions they might have. If you would like to have a discussion about your tax situation please call 01727 730550 to book a consultation."