Boris Johnson's National Insurance hike has cleared the House of Commons with Tory critics vowing to keep a close eye on how the extra cash will be spent.
It has been introduced to raise £36million to tackle NHS waiting lists and adult social care.
But the scheme has been criticised for being 'a kick in the teeth' for businesses and the self-employed who are recovering from the Covid 19 pandemic.
If you want more stories like this...
You can sign up to our e-bulletins of business news direct from our regional editors or our weekly round-up of the best articles in key sectors. Sign up here
How will the levy work and when does it begin?
There has been very little detail released at this stage about the Health and Social Care Levy but the key points are that from April 2022 there will be an increase of 1.25% to the rates of National Insurance before being shown as the separate Levy from April 2023.
David Shearer , a tax specialist at financial experts Old Mill explained that the increase will apply to employers, employees and the self-employed. This will therefore be an effective 2.5% increase for those individuals who own their own company and pay both the Employer and Employee Levy on their salary.
In addition, there will also be an increase of 1.25% in the rate of tax shareholders pay on the dividends they receive. As it is a straightforward increase in the rate of tax, it will have no impact on individuals who pay no tax on the dividend income, such as if the shares are held in ISAs or fall within the £2,000 dividend allowance.
How much will it cost businesses and employees?
Employers and employees contribute towards NI.
Most Read
Mr Shearer said that for the employer, the level of NI will be an additional £202 for an employee earning £25,000 and £515 on £50,000.
Have you seen our BusinessLive Linkedin Page? to find out more
For employees, someone earning £25,000 will expect to pay an additional £192.50 and an additional £505 for someone earning £50,000.
Downing Street said that a typical basic rate taxpayer earning £24,100 would pay £180 a year, while a higher rate taxpayer on £67,100 would pay £715 as a result of the new tax.
How will the funds be spent?
The Government has announced that its new £36 billion social care fund will be spent on innovation and new technology.
The investment, which will take place over three years, will pay for new treatments, diagnostic and surgical methods to help see more patients quickly and safely using tools such as surgical hubs, virtual wards and artificial intelligence.
The majority of the cash is going towards the NHS, with social care receiving £5.3 billion over the next three years.
Don’t miss
On Wednesday, the Department of Health and Social Care (DHSC) said the new funding will see the NHS deliver an extra nine million checks, scans, and operations for patients across the country in a bid to try and drive down waiting times.
It added the new surgical hubs, already used in hospitals such as Moorfields Eye Hospital in London, would help fast-track a number of planned operations, including cataract removal, hysterectomies and hip and knee replacements.
The hubs will be expanded across the country with more expected to be set up at existing hospital sites later on in the year.
Pop-up clinics are also going to be established while virtual wards and home assessments allow for patients to be given medical support from home.
With artificial intelligence, surgical robots are being used to conduct complex surgeries.
What has business reaction been?
David Shearer, a tax specialist at financial experts Old Mill says it is a ‘kick in the teeth’ for small business owners, pushing up staffing costs just as furlough ends.
And he said that the new tax on dividends means that small company directors are bearing the brunt of tax reform.
He said: " This group of sole traders and owner-managers running incorporated firms were overlooked during the pandemic in terms of access to support and this adds in another unforeseen challenge as they try to get back on track.”
The government’s planned 1.25 per cent hike in dividend tax and national insurance rates may mean pressure for increases in capital gains and income tax will subside, said Adrian Young, a tax partner at accounting and business advisory firm HURST.
He said: "Looking at the broader tax landscape there are some longer-term issues to consider.
Firstly, there was a lot of speculation earlier this year about rises to capital gains tax and income tax rates to pay for the pandemic.
Perhaps the new levy means that pressure for other rate rises will subside. It would take a brave Conservative politician indeed to raise tax rates on top of the increase in national insurance.
"Secondly, it’s difficult to see how the increase in the national insurance rate can be reversed, at least in the short to medium term. This means that the increase could start to become part of the fiscal fabric for years to come."
Suren Thiru, head of economics at the British Chambers of Commerce, said that it was opposed to the increase.
He said: "Firms have been hammered by 18 months of covid related restrictions and have built up huge debt burdens.
"This rise will impact the wider economic recovery by landing significant costs on firms when they are already facing a raft of new cost pressures and dampen the entrepreneurial spirit needed to drive the recovery," he said.
Stephen Phipson, chief executive of Make 海角视频, called on the government to consider other streams of revenue.
He said: "After witnessing large scale redundancies at the height of the pandemic and the plug being pulled on the furlough scheme, government should be putting in place measures to protect jobs and incentivise recruitment."