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What the changes mean for employers, employees, and the self-employed

The UK government announced their new plan for health and social care in September 2021. Funding for the reforms partly comes through a rise in dividend tax rates. There will also be a temporary increase to National Insurance before the introduction of a separate Health and Social Care Levy. If you’re an employee, employer, or self-employed, these changes are likely to affect you.

How much will the healthcare levy changes cost me?

The health and social care changes will see a 1.25% increase to some types of tax. Though the 1.25% levy will affect some types of National Insurance, once it becomes a standalone deduction it will, unlike NI, be payable by employees who are over State Pension age.

Who is affected by the tax and NI changes, and the new health care levy?

Class 1 (Primary) National Insurance, which employees pay

Class 1 (Secondary) National Insurance, which employers pay

Class 4 National Insurance, payable on self-employed income

Dividend tax

How to pay the 1.25% levy

Employees pay Class 1 (primary) National Insurance through their employers. The levy will be deducted from pay in the same way that NI is at the moment.

Employees stop paying NI when they reach State Pension age, but must pay the 1.25% levy from April 2023.

You won’t pay National Insurance once you reach State Pension age, including in 2022/23 when NI temporarily increases to include the levy. Once it becomes a separate charge in April 2023, you’ll pay the levy, but still won’t need to pay NI.

Our table below shows how and when National Insurance and healthcare levy changes will kick in for employees.

2021/22
(6th April 2021 to 5th April 2022)
2022/23
(6th April 2022 to 5th April 2023)
2023/24
(6th April 2023 to 5th April 2024)
Primary Threshold: £9,568
Employees pay NI on earnings above the Primary Threshold up to (and including) the Upper Earnings Limit (£50,270)
12% NI 13.25% NI 12% NI, plus 1.25% levy
Upper Earnings Limit (UEL): £50,270
NI is charged at a different rate on earnings above the Upper Earnings Limit.
2% NI 3.25% NI 2% NI, plus 1.25% levy

 

National Insurance, Dividend Tax, and the Health and Social Care Levy Changes - Employees

Example of Class 1 NI and the new levy for employees

You’re eligible to pay NI, and work for an employer who pays you £60,000.

As an employer you’ll need to deduct your employees’ contributions, and pay them to HMRC alongside your contributions as their employer.

2021/22
(6th April 2021 to 5th April 2022)
2022/23
(6th April 2022 to 5th April 2023)
2023/24
(6th April 2023 to 5th April 2024)
Secondary Threshold: £8,840
Employers pay NICs on what an employee earns above this threshold.
13.8% 15.05% 13.8% NI, plus 1.25% levy

 

National Insurance, Dividend Tax, and the Health and Social Care Levy Changes - Employers

Does the new levy affect the Employment Allowance?

Employers will still benefit from the Employment Allowance. It means that each time you run payroll you’ll pay less employer’s NI, until you use up the £4,000 allowance or start again in a new tax year.

Learn more about The Employment Allowance for employers’ NI.

What happens when employees reach State Pension age?

Employers need to update employees’ National Insurance category to ‘C’ once they reach State Pension age. As an employer you’ll continue making NICs for them, but you won’t deduct NI from their pay anymore. From April 2023, employees will pay the 1.25% levy, even if they’re over State Pension age, so you’ll need to deduct this from their wages.

The Health and Social Care Levy will also affect Class 4 National Insurance, which is paid by self-employed workers. It won’t affect Class 2 NI, or voluntary Class 3 contributions.

 

2021/22
(6th April 2021 to 5th April 2022)
2022/23
(6th April 2022 to 5th April 2023)
2023/24
(6th April 2023 to 5th April 2024)
Lower Profits Limit (LPL): £9,568
Self-employed income above this threshold incurs Class 4 NI.
9% 10.25% 9% NI, plus 1.25% levy
Upper Profits Limit (UPL): £50,270
Self-employed income above this threshold incurs Class 4 NI at a different rate.
2% 3.25% 2% NI, plus 1.25% levy

 

National Insurance, Dividend Tax, and the Health and Social Care Levy Changes - Self-Employed People

You won’t pay the levy on any self-employed income below the £9,568 Lower Profits Limit threshold.

The new levy increases the rate payable on taxable dividend payments by 1.25% from April 2022 onwards. Our table below shows the new rate of dividend tax, but remember:

 

2021/22
(6th April 2021 to 5th April 2022)
2022/23
(6th April 2022 to 5th April 2023)
Basic rate taxpayers pay the dividend ordinary rate. 7.5% 8.75%
Higher-rate taxpayers pay the dividend upper rate. 32.5% 33.75%
Additional-rate taxpayers pay the dividend additional rate. 38.1% 39.35%

 

The levy will be administered depending on how you declare and pay NI and dividend tax. In short, the process for paying NI and your dividend tax (and now the new levy) won’t change, but the rates will.

For employers and employees, the levy will be administered through PAYE. Employers deduct the amount from employees’ wages, and pay it on their behalf to HMRC along with their own employer contributions. Self-employed people will pay the levy through their Self Assessment tax return, as will anyone paying the levy along with dividend tax.

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About The Author

Elizabeth Hughes

A content writer specialising in business, finance, software, and beyond. I'm a wordsmith with a penchant for puns and making complex subjects accessible.

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