Health & Social Care Reform or Sticking Plaster?

This week we heard about a new 1.25% tax to fund health and social care, but as only £5.4bn of the £36bn raised over the next 3 years will be spent on social care, this seems to be another tax 'pot' such as national insurance and income tax from which to fund the NHS.

Unfortunately, tax simplicity and clarity is something we never see from governments making it harder for everyone, including HMRC, to understand the tax system. So how might you respond?

To set the scene,

From April 2022, the following NICs will increase by 1.25% for one year only:

• Employee NIC (over £9,568)
• Employer NIC (over £8,840)
• Benefit in Kind Class 1A (all levels)
• Payroll Settlement Agreements Class 1B (all levels)
• Class 4 NIC for sole trader and partners (over £9,568)
• Employees of umbrellas companies (over £8,840, 2.5% over £9,568)
• Limited companies within IR35 (over £8,840, 2.5% over £9,568)

And the following income tax will increase by 1.25%:

• Dividend tax (over £2,000)

From April 2023, the NIC % will revert to current levels and the amounts above will be renamed a 'Health and Social Care Levy' showing up as such on payslips and start to apply to employed pensioners.

It's a common trick to call a new tax, a 'levy', but it's a tax.

What will you get for it? From October 2023, lifetime care home fees will be capped at £86k presumably hoping that the family home doesn't need to be sold to pay for this level of fees.

Employers may not pay the new tax:

• If employers NIC is less than £4k
• An employee is an apprentice
• An employee is a veteran
• The employer is in a freeport

Apart from looking at these exceptions, how might you respond?

Shareholder-directors - use your normal dividend tax threshold in full before April 2022

If you tend to keep your dividends in the basic rate band paying 7.5% dividend tax on total income up to £50,270, ensure you use this band in full before 5 April 2022, before the increase to 8.75% from 6 April 2022. 

Ditto for higher rate band dividends from £50,270 up to,say, £100k to pay as many dividends at the current 32.5% rather than the increased 33.75%. 

You'll need enough after-tax profits to pay the dividends, as usual, and check the effect of your other taxable income such as property rents.

Sole traders and partners -  ensure you use accruals accounting, rather than cash accounting

Unrepresented taxpayers tend to report cash income (and costs), not allowing for unpaid invoices or work-in-progress.

You may wish to revisit this, to ensure as much net profit as possible is taxed at 9% NIC rather than the increased 10.25% on profits between £9,568 and £50,270 or 3.25% in the higher rate band on profits above £50,270.

All businesses - revisit other ways to take money out of your company/business from April 2022

The new tax increases the value of tax efficient alternatives, such as replacing existing dividends with a new electric car or employer pension contributions. Sole traders and partners will benefit from investing in plant and equipment including a new electric car or van for use by the business.

Increase prices?

Prepare or update your business plan, checking your margins, to see how you might recoup this additional cost to you and your business.

Sell up or retire? 

This may be another reason, after the pressures of the pandemic, to sell up or retire from your business, possibly paying 10% capital gains tax on its value.

Interesting that this announcment, well before the budget on 27 October, leaves the Chancellor clear space to focus on his other tax and spending plans. What will we see then? 

Further details as always can be obtained from your On The Spot Accountant.