The new health and social care levy made headlines upon its announcement in September 2021.
It will fund the NHS and social care in the coming years by requiring an increase in National Insurance contributions (NICs) from both employers and employees.
It will be introduced as a temporary measure for tax year 2022/23, and then will be permanent from tax year 2023/24 onwards.
At that point, it will be identified as a separate deduction compared to income tax and NICs.
In this blog, we take an in-depth look at the new levy, what it means for your clients and their employees, and what you need to know to help businesses prepare and adapt.
Here’s what we cover:
What is the health and social care levy?
At the heart of the levy is a 1.25% increase from both employee and employer, making for an effective 2.5% contribution per employee. Dividend taxes are also raised by 1.25%.
The levy is implemented as follows:
6 April 2022 to 5 April 2023
- Employers NICs: 1.25% increase in Class 1, 1A and 1B National Insurance Contribution (NIC) rates, taking them up to 15.05% (from 13.8% currently).
- Employee NICs: 1.25% increase in Class 1 NIC rates. This takes the rate up to 13.25% for earnings below the NIC Upper Earnings Limit (from 12% currently), and to 3.25% above that limit (from 2% currently).
- Self-employed: 1.25% increase in Class 4 NICs, taking the rates up to 10.25% and 3.25% (from 9% and 2% currently).
- Dividend tax: Basic, Higher and Additional rates all rise by 1.25%, so become 8.75%, 33.75%, and 39.35% respectively (rising from 7.5%, 32.5% and 38.1%). Nothing else about the dividend tax changes, which is to say, the tax-free allowance of £2,000 remains and it continues not to apply to ISAs.
6 April 2023 onwards
- Health and Social Care (HSC) Levy: Entirely new PAYE contribution that runs alongside NICs and is administered in an almost identical way (including a need to be identified on payslips/within payroll). Both employee and employer will pay 1.25%, making for an aggregate of 2.5% per individual.
- Employer and employee NICs: The temporary levy increase of 2022/23 no longer applies to Class 1, 1A and 1B NIC rates.
- Self-employed: 1.25% HSC levy will be paid via Self Assessment or potentially MTD for Income Tax as of April 2024, depending on the individual.
- Divdend tax: As above.
Who does the health and social care levy apply to?
As of its April 2023 introduction, the new levy should be applied to the same earnings as Class 1 NICs above the Class 1 NIC primary and secondary thresholds. It applies UK-wide, as do the temporary NIC increases of 2022/23.
In other words, it’s helpful to consider the levy as a NIC increase in all-but name.
For example, the levy will be subject to the same reliefs as NICs (e.g. for employees under the age of 21, apprentices under 25, qualifying freeport employees, and the employment allowance).
The levy applies to those considered deemed employees under IR35.
However, the levy differs from NICs in an key way: the HSC levy applies to the earnings of individuals above state pension age with employment income or profits from self-employment above £9,568.
Furthermore, the HSC levy doesn’t apply to the self-employed who only pay Class 2 (that is, who don’t pay Class 4 NICs, for which it does apply). It doesn’t apply to those that only pay voluntary Class 3 NICs, either.
How does the health and social care levy affect employees?
Each employee will effectively have an additional 1.25% of their gross income deducted via PAYE as of April 2022, making for an effective paycut.
Self-employed individuals will face increased NICs as of 2022/23 and then the HSC levy itself as of 2023/24.
To compensate for what is effectively a paycut, employers might consider a renewed focus on salary sacrifice schemes as a means of cost-efficient remuneration for employees.
Many employers already offer pension contributions by this method but schemes such as bikes for work, childcare, and training can be ways to reduce taxable pay, and therefore reducing the HSC levy’s impact on wages while delivering a desirable non-cash benefit.
Beware that not all salary sacrifice offerings can be used to reduce taxable pay, however.
When it comes to benefits-in-kind, it’s not yet been made clear by the government if the NIC increase of 2022/23 and new levy as of 2023/24 onwards apply to Class 1A or Class 1B NIC liabilities. However, the legislation states that Class 1A and 1B NIC will rise in line with Class 1 NIC from 6 April 2022, and that benefits in kind will be subject to the HSC levy from April 2023.
During the temporary NIC increase of 2022/23, agreements to transfer employer’s NIC on share-based payments should be amended to limit the amount borne by employees to the current rate.
How does the health and social care levy affect employers?
Employers have a number of issues to consider, as follows:
- Workforce costs increase by 1.25% from 6 April 2022, while employees experience an effective 1.25% paycut. This should be considered for employees and contingent labour, as well as payments for agency or temporary workers that might increase correspondingly.
- Internationally mobile workers: In particular, the potential increase in assignment costs where individuals are subject to UK NICs (e.g. where in-bounds are unable to remain in their home country social security systems, or out-bounds remain within NIC while working overseas). It should be decided sooner rather than later whether and how assignment policies can be amended to best manage the social security costs.
- Communication and education: Outline the impact of the HSC levy on wages and discuss options such as salary sacrifice as soon as possible amongst the workforce.
- Corporation tax increase: Although not directly connected, incorporated businesses should consider the HSC levy alongside corporation tax increases come into effect in April 2023, and that were announced in the Spring 2021 Budget announcement. This means businesses with non-ringfenced profits over £250,000 face a rate of 25%, while a new small profits rate (SPR) of 19% applies to companies with profits of £50,000. Businesses with profits between these two extremes will have varying marginal reliefs on the 25% rate.
- Payroll software updates: Cloud software users such as those using Sage Payroll will find their software is updated well in time for the new measures. Those using older desktop-only software may need to apply software updates, or configure the software for higher NICs, before payrolls are run as of April 2022.
How does the health and social care levy affect the self-employed, or who otherwise work for themselves?
As mentioned earlier, self-employed individuals such as sole traders that pay Class 4 NICs via Self Assessment face reduced profits.
These might be more substantial than they first seem.
For example, a higher income of £150,000 will require Class 4 NIC contributions of £1,755.41 in 2022/23 (in the period when the levy is applied via NIC increases).
That’s an increase of nearly 31%.
Furthermore, although not directly connected, the planned basis period reforms in April 2023 could mean self-employed businesses and partnerships that don’t have year-ends of 30 March/6 April will have more than 12 months of profits taxed in 2023.
This will lead to larger than usual tax and Class 4 NICs that year, and could work to compound the impact of the increased HSC levy NICs.
For those that run their own company as the sole employee and shareholder, and take dividends as well as a salary, the increased dividend tax could be a cause for concern alongside increased Class 1 NICs.
Furthermore, the aforementioned corporation tax increase as of April 2023 could impact profits at the same time.
Final thoughts on the health and social care levy
While the legislation is still working its way through parliament, the HSC levy is a classic example of a seemingly simple adjustment to payroll and wages that can affect individuals and businesses in a surprising number of ways.
It shoudn’t be assumed that it’s merely a small tax change with negligible impact.
We’ve outlined some of the major effects above, and you should begin the process of not just communicating these to your clients but also applying them to their financial situations so the NIC increases of April 2022 and then the HSC levy as of April 2023 cannot come as a surprise.
Clients should be helped to see in real terms the effect of the levy on their cash flow and payrolls.