What does the new Health and Social Care Levy mean for freelancers?

Last Updated on 9 September 2021

HMRC logo

The Westminster government invented a new tax for the UK this week. You can’t have failed to notice that we’re all going to be paying a ‘Health and Social Care Levy’.

You’ve probably also heard that it’s something to do with national insurance.

Well sort of. Here’s a look at the key features and how they might affect freelancers.

What’s this new tax?

From April 2023 HMRC will be collecting a 1.25% tax (the Levy) based on employee earnings, or self-employed sole trader profit.

This will have similar rules to national insurance. So if you’re paying NI, you’ll also be paying the new Levy. Employers will also have to pay the Levy if they’re paying employer’s national insurance on their employees’ salaries.

So if I don’t pay NI, I don’t pay the Levy?

Not so fast!

The Levy will also be paid by people who are over state pensionable age, as long as they are earning enough. These people don’t pay NI, but will be paying the Levy.

Dividend taxes are also going up. This has been sneaked in as if part of the Levy, but it isn’t. It’s just an increase in dividend tax. So if you’re paying tax on dividends from shares (including from your own company) you’ll be paying an extra 1.25%.

So the Levy isn’t coming in until April 2023?

Technically yes – but in reality it will happen from April 2022.

The Levy comes into existence from April 2023 (the start of the new tax year), but the government wants to start raising the money sooner. So, for one year only, most National Insurance classes will increase by 1.25 percentage points.

Presumably this is easier to do than to create a new tax in less than six months. Fiddling with NI, which is UK-wide, also avoids complications (and scrutiny?) with Scottish and Welsh income tax systems. The Levy will all be separated out on payslips and tax returns from the 2023-24 tax year.

Impact on freelancers – type by type

Let’s have a look at how this will work for freelancers. As there are three main freelancer types, it’s worth taking them one by one.

For more about the three types, check out our ‘What is a freelancer’ page >

PAYE freelancers

PAYE freelancer

From April 2022 you’ll notice your NI contributions on your payslip will go up from 12% to 13.5%.

The rate on earnings above £50,270 will go up from 2% to 3.25%

The employer will also have to increase their employer’s NI from 13.8% of your salary to 15.05%. This is calculated on your salary but is paid by the employer, not you, which is why businesses hate it.

From April 2023 your NI will revert to the normal rate, and you’ll see a separate Health and Social Care Levy appearing on your payslips.

Sole Trader freelancers

sole trader

From April 2022 you’ll notice your class 4 NI bill will go up from 9% of profits to 10.25% of profits.

The rate on profits above £50,270 will go up from 2% to 3.25%

From April 2023 your NI will revert to the normal rate, and you’ll see a separate Health and Social Care levy appearing on your tax bill.

Payment of the Levy will happen at the same time as your income tax and NI bill.

Class 2 National Insurance is unchanged, and is still a weekly charge depending on how many weeks of the tax year you were registered as a sole trader.

Limited Company Freelancers

Limited company freelancer

If your company pays you a salary, from April 2022 you’ll have to increase all the class 1 NI contributions (employee’s and employer’s) as stated above with PAYE freelancers.

The payroll software should be able to do this for you automatically. You’ll just notice the amount going to HMRC will be larger.

If you take dividends they will be taxed more from April 2022. The tax-free allowance (currently £2000 in 2021-22) will remain, but the dividend tax will go up by 1.25% percentage points.

Lower rate: 7.5% to 8.75%
Higher rate: 32.5% to 33.75%
Top rate: 38.1% to 39.35%

This has been couched as a way of spreading the load of the Health and Social Care Levy, but the increase in dividend taxes is not part of the Levy. It’s just a tax increase.

This is based on announcements at time of writing. Things may change, so let me know if I’ve got anything wrong or if you have any questions.

Posted on 09 September 2021

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