Tax: Government continues to bring in new taxes

Rishi Sunak, Chancellor of the Exchequer, has confirmed that this year’s Autumn Budget will take place on 27 October 2021. However, it may be that the most important tax news of the year happened on 7 September, with the introduction of the new health and social care levy. Pitched as a new tax, it continues the Government’s trend of introducing new taxes rather than increasing existing taxes. 

Another new tax which will be introduced from April 2022 is the UK residential property developer tax. The draft legislation was published on 20 September, to some criticism by the British Property Federation. Final details of both taxes are expected in the Budget.

Health and social care levy

The health and social care levy will be introduced from April 2022 at 1.25%. Initially, for the 2022-23 tax year, it will operate as a simple increase in the rate of class 1 NIC (including class 1A and class 1B paid by employers on employee expenses and benefits), and class 4 NIC. The increase will be 1.25% for employees, employers and the self-employed. This means an effective total increase of 2.5% for employed workers (1.25% for each of the employee and the employer), and 1.25% for self-employed individuals.

From April 2023, the levy will operate as a separate tax and will be shown separately on payslips and self-assessment payments. The 1.25% levy will also apply to those still working above state pension age (who do not pay NIC) from April 2023. The new levy will apply on the same principles as NIC, specifically to the same population and income as classes 1 and 4 NIC, and will be collected via PAYE and self-assessment.

For small businesses qualifying for the £4,000 annual employment allowance for NIC, the allowance can be used against the health and social care levy as well as NIC liabilities. Individuals operating through personal service companies will have to pay the levy on any salary paid by their company, and if they take their income in the form of dividends from the company, the tax rate on those dividends will also rise by 1.25% from April 2022.

Employers may also consider the reward packages being offered to employees and whether there are efficiencies that could be made in order to make their incentivisation more attractive, for example by utilising salary sacrifice arrangements, including in respect of pension arrangements. As the levy is a new tax in its own right, lawyers should ensure that all employment contracts, corporate documents and precedents are drafted widely enough that the levy is covered within the relevant provisions in relation to employment tax and NIC.

Residential property development tax (RPDT)

The draft legislation confirms that the new RPDT, which will tax the profits of the largest residential property developers, will not include most student accommodation; however, build-to-rent developments have not been excluded, despite calls from the British Property Federation (BPF). The draft legislation provides that student accommodation buildings will be excluded from the tax if they are designed or adapted, or are being constructed or adapted, for use by students or school pupils and it is reasonable to expect that the building will be occupied by students or school pupils on at least 165 days a year.

RPDT is one of the measures designed to contribute to the costs of the Government’s plan to remove unsafe cladding from leased residential buildings. The BPF said it would be “unfair” to levy RPDT on build-to-rent developers to enable remediation work in the homes-for-sale market, given that build-to-rent investor-developers remain fully liable for remediation work and costs are not passed on to renters.

RPDT will apply to the residential property development profits of companies that undertake UK residential property development activities. Tax will only be charged on profits exceeding an annual allowance, which has not been confirmed, but the earlier consultation suggested a figure of £25 million. RPDT will only apply to companies which (i) have or had an interest in the land concerned, and (ii) are subject to corporation tax, so will not apply to charities such as housing associations or to the property rental business profits and gains of real estate investment trusts.

The tax on the residential property development profits will be charged as if it were an amount of corporation tax. However, the method of calculation is different as finance costs are not deductible. The rate of the tax has not yet been announced.