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How will the health and social levy impact UK advice clients?

There are some steps that advisers ‘may want to consider’

Recently, we had the final confirmation from the prime minister and the chancellor that they will be proceeding with an increase in National Insurance contributions (NICs) from April, writes Jon Dodson, technical and propositions manager at Redmill Advance.

Though the intent has been signalled for some months, there had been some internal pressure in Westminster to step away from the plan on the basis that it appears to contradictory to previous pledges.

Increased taxation commonly follows a period of increased public spending, and it has clearly been deemed by this administration that an increase in the rates charged on NICs, and dividends, would prove less unpalatable in the short term than hikes in explicit earned income taxation – though the effect for many is broadly the same.

We also know that going forward, this increase is expected to be collected via a separate health and social care levy.

Financial advice impact

From a financial planner perspective then, the impact on clients is clearly that those that are earning will be paying more in deductions going forward.

It should be noted that from 2023/24 tax year the proposal is that health and social care levy will be payable by those above state pension age (SPA) too. This is a significant change as previously NICs have ceased at SPA.

The key figure is 1.25% – after you’ve exceeded the primary contribution threshold, all rates of NICs will be increasing by 1.25%. Adding a degree of symmetry to this, all dividend rates after the dividend allowance are increasing by 1.25% too.

From a planning point of view, there are some actions we may want to consider with clients.

We should ensure clients understand the changes and how they may impact them. Especially, clients aged 66 and over that have earned income, growing demographic.

Additionally, engaging with business owners that have employees paying class 1 NICs as they will need to increase their corresponding class 1 NICs and budget accordingly.

Also, salary sacrifice has always been important…. even more so in 2022/23.

Where a client is making net pay contributions to an occupational scheme, they should, if they haven’t already, consider using salary sacrifice to make these contributions – saving NICs, including the increase, on the gross value of the amount to be invested in the scheme.

The employer will also save the equivalent on the salary that has been sacrificed and this saving is often used to enhance the employer contribution made on the member’s behalf.

Incorporation

Despite the increase on dividend tax, the NICs increase is an additional incentive for unincorporated smaller businesses to think about incorporation and consider paying an income, beyond the lower earnings limit. through dividends – lower rates of income tax and no NICs to pay.

Going forward, the new levy will not be charged on dividends.

Over the course of the next few months, we can expect the picture to evolve more, but in relation to what we know, there are certainly things we can do to assist clients through some of the changes to the legislative landscape.

This article was written for International Adviser by Jon Dodson, technical and propositions manager at Redmill Group.

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