The way had been paved over recent months for a health and social care levy following on from the impact that the pandemic continues to wield on the NHS and our social care system.

It was therefore not entirely surprising that the Prime Minister announced the upcoming levy ahead of the Spending Review and Autumn Budget to be held on 27 October. 

National Insurance

The health and social care levy will initially be collected from the employed and self-employed through increasing National Insurance rates by 1.25% from 6 April 2022, .

This increase to National Insurance rates will also apply to employer's contributions and the UK Government anticipates large employers (or those with over 250 staff) will contribute around 70% of the expected £11 billion anticipated to be raised through the increase to National Insurance. National Insurance is not a devolved tax and so the increase will apply to all taxpayers in the UK, albeit those earning less than the Primary earnings threshold for National Insurance purposes of £9,568 will not pay the levy.

From 6 April 2023 those aged over 65 and still earning will also pay the levy and from this date the levy will be collected and reported separately from National Insurance.

For Scottish resident taxpayers the announcement of this UK wide levy on earned income sees the overall tax rate increase still further. For those earning over £150,000 in a tax year for example, they will now pay 49.25% on every £1 earned versus 48.25% paid by English resident taxpayers.

If earning between £100,000 - £125,140 then a marginal tax rate of 64.25% tax will be suffered by Scottish taxpayers going forward. So for every £1 earned, less than 36 pence is taken home after tax.

For Sottish taxpayers earning £50,000 a year, the 1.25% increase in National Insurance sees a marginal tax rate suffered on income earned between £43,663 to £50,000 of 44.25%, versus taxpayers in the rest of the UK suffering a much lower 33.25% tax rate on that £6,337 of income. This is due to the different Scottish income tax rates and bandings which apply for Scottish resident tax payers on earned income.

In terms of the cost of the levy on someone earning £24,000 a year it will equate to an additional cost of £180, with the Prime Minister confirming that the bulk of the funding will be paid for by the UK’s top 14% of earners.

Dividend rise

For those living off investment income or extracting dividends from their company, then the levy will also take effect here by raising dividend tax rates by 1.25%.

Whilst the first £2,000 of dividend income will continue to be free of income tax, thereafter dividend rates (which apply across the UK) will change as follows:

• 7.5% to 8.75% for basic rate taxpayers
• 32.5% to 33.75% for higher rate taxpayers
• 38.1% to 39.35% for additional rate taxpayers

Triple lock

The UK Work and Pensions Secretary also announced that there would be a suspension for one year to the ‘triple lock’ formula for annual state pension increases.

The way in which the triple lock works is that pensions increase by the greater of inflation, the increase in earnings between May and July, or 2.5%.

For the year 2022/23 there will be a break from using the earnings increase, as due to the anomalies created by the pandemic, this could have resulted in an 8% rise to the state pension.

Instead, state pensions will rise by the consumer inflation rate or 2.5%, whichever is greater.

It is expected consumer inflation will be the higher of the two and so the state pension may rise by more than 2.5% in 2022/23, we will have to wait and see.  The triple lock is then to come back into effect for the remainder of the Parliament following the next financial year.

Whilst the announcements were somewhat anticipated, they do further complicate an already complicated income tax and national insurance system, particularly if you are a Scottish tax resident taxpayer and so already juggling the interaction of UK and Scottish tax rates on your income levels.

With the recent launch of Scotland’s First Framework for Tax, the UK wide tax announcements, the upcoming Spending Review and Budget late October, coupled with the upcoming Scottish budget, buckle your seatbelts for tax changes ahead.

If you have any questions or concerns relating to these recent announcements, please contact myself, a member of our Private Client Tax or Wealth team, or your usual Johnston Carmichael adviser.