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On 7th September 2021 the Prime Minister broke a Manifesto Commitment and announced rises to National Insurance in order to fix Social Care costs.

Of course its right to suspect that this may just be a sticking plaster – health and social care can be a near bottomless pit of expense as successive Governments on both sides have found, and all the taxes in the world won’t fix labour supply issues.

Anyway, the reforms are two fold.  First there is tinkering around the edges of what care costs are to be paid.  The proposals are:

  • Lifetime cap of £86k on having to fund personal care costs – after this, personal care costs, but not accommodation, is to be funded by Local Authorities.  Given most of the cost of Retirement and Care Homes goes on accommodation, it is questionable what this means in practice – when granny goes into care then, in reality, most of her assets will get eaten up on the accommodation element of care costs.
  • Means tested help with costs if assets are less than £100,000
  • Assets less than £20,000 protected

Really it is tinkering around the edges; arguably a more sensible and honest societal discussion is needed about the boundaries between self funding and state funding, and how this impacts inherited wealth expectations.

The second part of the changes, and probably of most interest, is an increase in National Insurance.  This comes in two parts.

  • For 2022-23 there is a 1.25% rise in Employers and Employees NI, Class 4 Self Employed NI and in Dividend Tax.
  • For 2023-24 onward, Employers and Employees NI comes back down to the 2021-22 rates, but instead a separate Health and Social Care Levy will apply. Presumably the rises in Class 4 Self Employed NI and in Dividend Tax will continue to be levied as per 2022-23.
  • The Health and Social Care Levy will apply from April 2023 at 1.25% for employers and employees, shown separately on payslips.
  • The Health and Social Care levy will continue to be paid by people over state pension age and still in employment, although they stop paying Employees NI at state pension age.
  • There are no proposed changes, other than inflationary, to the thresholds for NI.  It would seem the new Health and Social Care Levy will operate on the same thresholds as Employers and Employees NI.

So, what are the practical implications of this?

  • Broadly this means a widespread 1.25% in costs on both employed and self employed NI, and on dividends.
  • Employers are also paying an extra 1.25% in employers NI.
  • Employees, Self Employed and Company Directors will all be equally impacted.
  • Clearly the extra 1.25% payable by Employers may create pressure on pay growth.
  • Landlords, Pensioners and those living off bank interest will be unaffected.

Are there any options for mitigating this change?  Probably not, other than bringing income forward into 2021-22 from 2022-23.

As the rise is being mandated on Employed NI, Self Employed NI and Dividend Tax there is unlikely to be any significant change in the relative differentials between taxes for Self Employed v Limited Companies.