Government Announces Increase To National Insurance Rates & Dividend Tax To Tackle Health & Social Care Crisis

The Prime Minister has today announced his plan to tackle the social care crisis, which includes:

• A 1.25% increase in National Insurance (NI) rates and dividend tax from April 2022.
• From April 2023, the NI increase will be reversed and a health and social care levy will be introduced instead, which means pensioners who are still earning will also need to pay.
• In return, there will be a limit of £86,000 on social care costs.
• People will not pay for social care when their assets are below £20,000 and there will be a means test between that level and £100,000.

Response to the rise in national insurance rates and dividend tax

The Telegraph previously reported before today’s announcement that Philip Hammond had said increasing national insurance contributions (NICs) to pay for social care would provoke a “very significant backlash” for Boris Johnson.

Mr Johnson said he accepted this broke the manifesto promise but said it was not a decision made lightly, saying it was the “right, reasonable and fair approach“.

The 1.25% point increase means somebody on £20,000 a year would pay an extra £130, while someone on £50,000 would pay £500 more.

Helen Miller from the Institute for Fiscal Studies said:

Sky News has also reported how one MP said the plan appeared to be protecting the inheritances of those with means while ending the £20 uplift of universal credit that was originally given to poorer people to help them through the pandemic.

Dividend income

With the same increase in dividend tax rates, investors may also find themselves with a higher tax bill. Under current rules, dividends are taxed at 7.5% for basic rate taxpayers, 32.5% for higher rates and 38.1% for additional rate taxpayers.

However, it is important to remember that you can earn some dividend income each year without paying tax. You do not pay tax on any dividend income that falls within your Personal Allowance (the amount of income you can earn each year without paying tax).

You also get a dividend allowance each year, currently £2,000. You only pay tax on any dividend income above the dividend allowance.

Dividends from shares in an ISA are tax-free. Your ISA allowance is the maximum amount you can shelter from tax within an ISA during any one tax year, which runs from 6 April to 5 April and currently stands at £20,000. Once the new tax year starts, you get a new ISA allowance – so any unused allowance from the previous year goes to waste.

Comment

Tax changes are inevitable during savers lifetimes and today’s news is a reminder of the importance of revisiting and reviewing savings and investment plans to make sure you are making good use of the available tax allowances available to individuals and couples.