Tax hikes to raise money for social care

14th September, 2021

In a move designed to fund the spiralling cost of social care, the Government announced a controversial increase to National Insurance contributions (NICs) in the form of a 1.25% “Health and Social Care Levy”. Although pensioners do not pay NICs, workers of state pensionable age will have to pay the levy, which will take effect from April 2022.

The Government announced an increase of 1.25% in tax on dividend income. This means that tax on dividend income will increase from 7.5% to 8.75% for basic rate taxpayers, from 32.5% to 33.75% for higher rate taxpayers, and from 38.1% to 39.35% for additional rate taxpayers. At present, there appears to be no change to the annual tax-free dividend allowance of £2,000.

Many companies suspended their dividends in order to preserve capital during the Covid-19 pandemic, and have only recently reinstated their payouts, much to the relief of investors in equity income strategies. However, this new policy will affect individuals whose investments generate over £2,000 in dividends that are not sheltered in a tax-efficient wrapper like an ISA. The measures are expected to raise £36 billion over three years to fund social care and the NHS.

The Government also confirmed that the “triple lock” – which guarantees that increases in state pension rise by the rate of consumer price inflation or average earnings or 2.5%, whichever is the highest – will disregard the average earnings element during the 2022-23 financial year.

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