Health and Social Care Levy and Corporation Tax rates: What are the implications?

As a business owner, you always need to stay on your toes. This also means keeping up to date on new taxes. One of these is the new Health and Social Care Levy (HSCL) tax along with the increase in Corporate Tax rates. No matter what kind of business you’re running, you should be aware of the implications.

The birth of a whole new tax and how it might affect businesses

The Prime Minister announced that by April 2022, a 1.25 % HSCL tax will be levied along with a further 1.25 % increase in the dividend tax rate.

The HSCL is expected to raise at least £12B each year and will be set aside specifically to tend to health and social care costs. At first, HSCL will be added to National Insurance only – however, by April 2023, it will be regarded as tax on its own, with a dedicated percentage on employees’ payslips. Here’s what’s known about HSCL thus far:

The 1.25 % tax rate will apply to income just the same National Insurance, which in turn means, that it applies to earned income like salary and self-employed/business profits – but not unearned income like that from investments, property letting or pension. HSCL will have the same initial thresholds as National Insurance; it will be uncapped and apply to not just employees, but also employers and business owners/self-employed individuals.

As we just mentioned, the HSCL will initially be collected through National Insurance only, although historically speaking, there has been a misalignment between income tax thresholds and National Insurance thresholds; there are taxpayers who are not earning enough to pay income tax because their earnings are under the tax-free personal allowance which is £12,570 as of 2021/22. But those taxpayers must still pay tax through National Insurance on earnings which are higher than the starting threshold – £9,568 as of 2021/22. Therefore, these taxpayers will also be liable to pay HSCL tax after April 2022.

With the above in mind, once HSCL comes into its own as a separate tax by April 2023, the thresholds will be more in line with income tax – although we want to be hopeful that it does happen, current indications point to ‘not likely’.

So, if the thresholds do not change, it will probably affect those on low income who have not experienced a similar income tax increase in the past. In addition to the 1.25 % HSCL tax, the Prime Minister announced a 1.25% increase on dividend rates across the board – to ensure that those who have dividend income (such as investors, and business owners) will be encouraged to make a contribution which is in accordance with that made by self-employed individuals and employees on their earnings. This effectively increases the rates to:

• 75%, basic rate taxpayers
• 75%, higher rate taxpayers
• 35%, additional rate taxpayers

The tax-free dividend allowance remains the same – fixed at £2,000 – and any dividends received via ISAs will also remain tax-free.

For private business owners, the additional 1.25% employers’ HSCL tax and the 25% increase in Corporation Tax by April 2023 will be a delicate balancing act, especially if they are taking dividends and salary – a dividend tax rate close to 40% without Corporate Tax deduction makes taking dividends from the business a rather expensive option.

Are there alternatives?

The Prime Minister has said that to reach the £12B target through just income tax, the income rate will need to be fixed at 2%, with the burden falling almost entirely on employees and self-employed tax-paying individuals. The burden of the HSCL tax, however, will be divided down the middle between the employer and employee. It would be interesting to see whether employers ultimately choose to pass on the cost of HSCL tax to their employees. And even though this may be dependent on multiple factors, it’s quite likely that employees may end up taking on the full 2.5% cost of HSCL, which will potentially make it a far more expensive alternative than simply increasing income tax rates.

One more alternative might be to increase CGT (Capital Gains Tax), as per the suggestion which came from The Wealth Tax Commission in a December 2020 report, where they stated that doubling CGT rates in accordance with income tax rates may allow the Government to hit its £12B per annum target. On the one hand, the Prime Minister has already stated that he will not be raising CGT rates specifically for this purpose, on the other, we feel that any increases to CGT rates have not been entirely ruled out yet: the Autumn Budget is close at hand and it would be interesting to see what step the Chancellor takes in this regard.

Implications on Corporation Tax rates

According to experts, nearly 50% of the public may be prepared to pay higher tax rates themselves in order to fund public services. With that said, the most popular method was originally to introduce a new tax in the form of net wealth tax, or perhaps, increase taxes on capital.

Chances of further tax increases seem likely at the Autumn Budget 2022, and with the Manifesto commitment a thing of the past, accountants, lawyers and tax experts alike are questioning whether any chances to VAT and income tax will be considered or not.

Well, we personally feel that since Corporation Tax rates have now been increased and the health and social care funds target of £12B per annum has been identified – any more tax changes will focus more on perceived fairness and not revenue raising. Will another new tax be created this year? Probably not, but there will likely be reforms to the current taxes, particularly capital taxes.

If you wish to further understand and discuss the impact of the new HSCL tax and increased Corporation Tax rates, our Chartered Accountants in Slough are only a phone call away. They study the tax landscape very closely, helping businesses save hundreds to thousands of pounds each year, and ensure that they only pay the tax amount they are liable to.

contact us for a free, no obligation consultation on: 01753 373 505 or complete our Contact form and we will get back to you.

HMRC guidance on the subject on can be found here: https://www.gov.uk/government/publications/health-and-social-care-levy/health-and-social-care-levy