The Financial Impacts of the Social Care Levy
Following on from our previous blogs about Boris’s Social Care Reforms announcements, we want to get into the numbers. What does this new levy mean for you? How much more in tax will you be paying?
A recap of the Levy
It is an additional 1.25% charge on earnings, employment benefits, PAYE Settlement agreements and dividends. In respect of earned income, from 6th April 2022, unless you are a worker over state pensionable age, in which case from 6th April 2023. Regarding dividend income, from 6th April 2022.
How will the Levy be collected?
- On employed earnings it will be collected through the PAYE system.
- Initially, due to administrative constraints, from April 2022, it will be included within the employers and employees national insurance (NIC) rates and reflected as such on the employee’s payslip.
- From April 2023, the Levy will be separated out from the NIC and shown separately on the employee’s payslip.
- If you are self-employed the 1.25% will be included in your Class 4 NIC payments. From April 2022 the Levy will likely to be payable in January and July each year.
- For most self-employed, the likely first payment date may be 31st January 2024, unless you are over state pensionable age, in which case the first payment maybe as late as 31st January 2025.
- If you pay tax on dividends, the Levy will be added to the present dividend rates.
- Depending on your overall circumstances the Levy on the dividends may be payable either:
a) In January and possibly July each year. The first payment date may be 31st January 2024
b) You could request for the tax be collected through your PAYE code number during the tax year itself or, in some cases, during the following tax year.
As regards benefits, the Class1A additional amount will need to be paid by 19th July following the end of the tax year.
What are the new rates?
- Employers NIC will increase from 13.8% to 15.05% on earnings >£8,840.
- Employees NIC will increase from 12% to 13.25% on earnings between £9,568 & £50,270.
- Employees NIC will increase from 2% to 3.25% on earnings >£50,270.
Where your total income is:
- More than £50,270, the dividend rate will increase from 7.5% to 8.75%.
- Between £50,271 and £150,000, the dividend rate will increase from 32.5% to 33.75%.
- Greater than £150,000, the dividend rate will increase from 38.1% to 39.35%.
The Financial Impact
- Individual earning £20K – Additional cost £130. Employer cost £140
- Individual earning £50K – Additional cost £505. Employer cost £515
- Individual earning £100K – Additional cost £1,130. Employer cost £1,140
- Individual in receipt of a dividend of £20K – Additional cost £225
- Individual in receipt of a dividend of £50K – Additional cost £600
Exemptions from the Levy?
- It will not apply to pensionable income.
- Self-employed Class 2 NIC and the voluntary Class 3 NIC.
- As regards individuals, earnings below the employees NIC threshold presently set at £9,568). For employers, the NIC threshold is currently at £8,840.
- If your dividends are covered by your personal allowance (£12,570) and/or the tax-free dividend allowance of £2,000.
- Businesses employing apprentices under the age of 25, as long as their gross yearly income is less than £50,270.
- Those businesses who are employing anybody under the age of 21, as long as their gross yearly income is less than £50,270.
- Businesses who employ veterans from the armed forces where they are entitled to employers NIC veterans relief, as long as their gross yearly income is less than £50,270.
- Employers operating within Freeports, where they are eligible for employers NIC relief in respect of employing new employees, as long as their gross yearly income does not exceed £25,000.
- Dividends in an ISA will not be affected.
- The employment allowance (currently £4,000) can be offset against the Levy.
What are your options?
- Bringing forward the payment of dividends and bonuses pre 6th April 2022
- Restructuring the shareholding within your company to maximise the use of the £2,000 dividend allowance?
- Transferring some of your shares to your spouse or civil partner to maximise the use of the £2,000 dividend allowance?
- Bringing a family member into the business to make use of the first £9,568 earned income free of the Levy?
- Investing more through an ISA
At Big Hand 4 Business, we want to ensure that you are running your business in the most tax efficient way. So, if you would like to discuss any of the above options with us, then please get in touch today on 0161 327 2911.