An extra 1.25% will be added to the rates of National Insurance for employees, employers and the self-employed. The same amount will be added to the tax rates on dividends.
The Prime Minister announced the plans last week which also outlined proposals for social care funding in England, featuring a new lifetime cap of £86,000 on the amount individuals will be expected to pay for their personal care.
While there is still plenty of detail to come on these proposals and how they will be paid for, what could these measures mean for individuals and business owners?
In England, the £86,000 cap is just for the costs of personal care, whether this care is provided at home or in residential setting. The costs in respect of accommodation expenses remain uncapped.
This cap will apply to anyone entering care from October 2023. Those with assets below £20,000 will not have to pay anything towards the cost of care, while people with assets over £100,000 will have to pay all their care costs before the cap is reached. Those with assets between these two thresholds will share the costs with their local authority via means testing. Currently (in England), anyone with assets over £23,250 get no help towards care costs.
It should be noted that for those that receive care in their own home, the value of their home will not be included in the means test as things stand.
So, while the cap will provide a little more certainty for families, the actual amounts paid while in residential care could still come to much more than £86,000 and this should be factored into any savings and planning for later life care.
Impact of tax rises
These changes will be paid for by a rise in National Insurance for employees and the self-employed with pay or profits over the primary earnings threshold (currently £9,568), and a rise in the dividend rates of tax.
So, someone with a salary (or profits) of £50,000 will face an additional annual tax charge of £505. It should also be noted that the extra 1.25% will be payable by those still working and over State Pension age.
The dividend ordinary rate, upper rate and additional rate will increase to 8.75%, 33.75% and 39.35% respectively. There will be nothing to pay if dividends fall within the personal allowance and/or the current allowance of £2,000.
It is therefore good housekeeping to ensure that those with larger equity based holdings make the most of ISAs or pensions to protect savings from income tax and capital gains tax. Couples could also ensure where possible that assets are split to make the most of personal allowances and tax bands if necessary.
The rate of employer National Insurance will also rise by 1.25% to 15.05%. However, existing NICs reliefs to support smaller employers will also apply to the Levy.
One of the reasons many business owners take their profits as dividend is because, unlike salary, they are not subject to National Insurance. But the increase in the dividend rate coupled with the rise in corporation tax to 25% from 2023 could have a significant impact when making future decisions on how to take profits.
This could strengthen the arguments for taking profits as a pension contribution subject of course to certain limits.
For example, from 2023 every £1,000 of company profit taken as dividend would produce a net income of £497 for a higher rate taxpaying director. If instead the £1,000 is paid into a pension, this could provide the same director with a net income in retirement of £700.
The recent announcement will provide some certainty for those planning for care in the future.
It is unlikely that most employees will be able to counter the proposed tax increases to fund the personal care cap, but there could be an incentive for business owners to re-think their remuneration strategy and consider the benefits of funding a pension.