Techzone

UK taxpayers face an increase in taxation from April 2022 to fund long awaited reforms in social care and additional support for the NHS.

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 in a paper 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, business owners and trustees?

Individuals

The future cost of care

In England, the £86,000 cap is just for the costs of personal care, whether this care is provided at home or in residential care. The so called 'hotel' costs in respect of accommodation and meals in a care home 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 based on a means test. 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. The Government also hope that their proposals will inspire insurance providers to develop products to help with costs of 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 tax charge of £505 p.a., rising to £1,130 at a salary of £100,000. It should also be noted that the extra 1.25% will be payable by those still working and over State Pension age.

Salary sacrifice is a turn to method for redirecting both employer and employee National Insurance contributions into pension savings, but it is not known whether legislation will allow this, particularly given that from April 2023 the increase in NI will become a separate 'health and social care Levy'.

For those who already benefit from a salary sacrifice arrangement it may well be that any additional sacrifice is not worthwhile, but for clients who have no sacrifice arrangements in place, this could be an incentive to consider entering into an arrangement to save 'normal' NI and bolster pension provision, even if it does not affect the new Levy. After all, the tax benefits of funding a pension is one way of saving towards care in later life.

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 0% band 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. Offshore investment bonds may be an option too, particularly if future chargeable events are to be assessed on non-taxpayers.

Business owners

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 the annual allowance 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.

Taking the dividend option at today's rates would net a little more at £547, with still £700 return from a pension, i.e. the pension option from 2023 could return an extra 5% (ignoring growth).

Trustees

The dividend rates for trusts is not specifically mentioned in the Government paper. However, they are linked to the dividend ordinary rate and dividend additional rate and are expected to increase in line.

So any dividends falling in the first £1,000 of trust income will be taxed at 8.75%, with the remainder at 39.35%.

For trustees accumulating income this will have an additional drag on returns.

But for trustees who like to pay out the full dividend to the beneficiaries there should be no noticeable difference apart from the tax administration. Dividends will still have to be paid as 'trust income' after accounting for tax at 45%. And beneficiaries will still receive a tax credit of 45% which they will be able to use to reclaim some or all of the tax paid, depending on their personal tax status.

Summary

The Government plans will provide some certainty for families planning for care in later life, which will become clearer when the proposals are fleshed out.

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.

As ever, the devil will be in the detail.