A new Health and Social Care Levy will be brought in from April 2022, to be paid for by increasing rates of National Insurance Contributions. Although it breaks the Conservative’s manifesto pledge on raising taxes, the Prime Minister has confirmed that national insurance contributions will be increased by 1.25% to pay for the impact of the coronavirus pandemic on the NHS and to address the long-standing funding gap for health and social care.
Employers will also pay a 1.25% increased rate of national insurance, so the total collected from businesses and workers will be 2.5%. Proceeds from the levy will be ringfenced to ensure they are spent on health and social care only.
Below we have summarised the financial impact of the new policy for independent workers:
Temporary Employee/Workers (via a recruitment agency or direct)
Employees and temporary workers on PAYE currently pay Class 1 NI contributions, which is 12% on pay over £797 per month, or £9,568 per year. Earnings above £50,270 are charged at 2%. Once the tax rates increase is introduced, these rates will rise to 13.25% and 3.25% respectively.
Your employer or the company that pays you will also pay an increased rate of NICs, i.e. 1.25% more on both class 1A and class 1B NIC paid by employers.
The same as for temporary workers above, but it is important to also be aware of the increased employers NICs. When working through an umbrella you will often be quoted an assignment rate or uplifted rate which is your pay rate plus the overheads which includes employers NICs.
In the run up to April 2022 make sure you know if the higher NICs rates for both employers and employees have been factored in or not. If you aren’t sure then just ask, don’t assume otherwise you could find yourself financially worse off than you expect.
Self-employed sole traders
Self-employed workers pay Class 2 and Class 4 contributions on their profits. In 2021-22, that’s £3.05 per week Class 2 NICs if you earn more than £6,515, plus a 9% Class 4 contribution on earnings between £9,568-£50,270. Earnings over £50,270 are charged at 2%.
Class 2 contributions look set to remain at £3.05 per week, and the 1.25% rate rise would mean self-employed workers will pay Class 4 contributions of 10.25% and 3.25%.
Self-employed limited company contractors
Alongside the levy, which will be paid by employees, the self-employed and businesses, the government has announced a 1.25% increase in dividend tax rates from 1 April 2022. This means that self employed people who work through a limited company and draw money via dividends will also contribute to the levy. New dividend rates will be 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers and 39.35% for additional rate taxpayers. The current £2,000 dividend allowance will remain.