Editor’s note: In the government’s mini-Budget on 23 September 2022, it was revealed that the health and social care levy has been cancelled. Learn more in our article: Mini-Budget 2022: What the announcements mean for your business.
In September 2021, the UK government announced the health and social care (HSC) levy.
As with any change in taxation, the introduction of the levy provides an opportunity to empower and educate employees when it comes to salary payments so that they feel more in control.
In this article, we highlight details of the new health and social care levy, what it covers, what it means for National Insurance contributions, and what it means for you and your employees.
Here’s what we cover:
- What is the health and social care levy?
- What does the health and social care levy cover?
- 2022-2023: HSC levy’s increase in National Insurance contributions
- 2023 onwards: How to apply the HSC levy to wages
- The HSC levy’s impact on payroll for employers
- HSC levy’s cash flow considerations for employers
- What the HSC levy means for employees
- Final thoughts on the health and social care levy
What is the health and social care levy?
The HSC Levy is a new and additional type of personal income tax. The chief way it’s funded is from earnings – that is, deductions via PAYE in the case of full-time employees.
As such, the levy is potentially payable by the majority of the UK’s working population and, unlike many tax increases, it impacts most salary grades for those over 25 years old.
It’s very similar to existing National Insurance (NI) in form and function, and in fact is funded by an increase to NI contributions (NICs) in its first year (the 2022/23 tax year).
However, there are a handful of quirks that mean it’s not exactly the same as NI, so care must be taken. We discuss these below.
The HSC levy is also part-funded by an increase to dividend tax, which as the name suggests, affects those that take dividends from companies.
As such, this doesn’t affect payroll for the majority of employees. It may affect those that own their own company for which they’re the only employee and who take dividends in addition to a salary.
What does the health and social care levy cover?
The HSC levy is a new and permanent tax intended to pay for increasing NHS costs, plus the increased costs of adult social care.
The government doesn’t believe these can be covered by increases in borrowing. Therefore, it’s introducing a third type of income tax that eventually will run alongside tax and National Insurance deductions.
2022-2023: HSC levy’s increase in National Insurance contributions
The HSC levy will be introduced as of April 2022. For this first year, until April 2023, it is funded by a temporary increase in National Insurance contributions.
From the second year onwards (April 2023), it will be identified on wage slips and within payroll software as a separate deduction alongside income tax and National Insurance.
Both employer and employee National Insurance contributions (NICs) are increased by 1.25%, making for a total of 2.5% per employee.
This effectively means that employee pay is cut by 1.25%, while the cost of payroll for that employee increases by 1.25%.
Here’s how the increased NICs for April 2022–April 2023 pan out:
- Employer 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).
2023 onwards: How to apply the HSC levy to wages
From April 2023, the temporary levy increase of 2022/23 will no longer apply to Class 1, 1A and 1B NIC rates. Instead, an entirely new HSC Levy will be identified on payslips and remunerated via an update to the PAYE system.
This is as follows.
- Health and Social Care (HSC) Levy: Payslips will identify an employee contribution of 1.25% of before-tax salary, while employers will pay 1.25%, making for an aggregate of 2.5% per individual. The way this is processed within payroll software will be very similar to Class 1 NIC payments.
There’s an important note for older employees.
When the HSC Levy becomes a discrete tax as of April 2023, it will differ from National Insurance contributions in that it will apply to individuals above the state pension age who have employment income above £9,568.
Notably, the HSC levy does not apply to people of pensionable age prior to this, when the levy is collected via an increase in NICs.
At the other end of the spectrum, if an employee enjoys a zero rate of secondary Class 1 NICs then the HSC levy shouldn’t be applied. Examples of such employees include those under 21 years old and apprentices under the age of 25 years old.
Furthermore, certain types of employees at freeport sites and former services employees in their first 12 months of employment might also enjoy a zero rate of Class 1 NICs.
The HSC levy’s impact on payroll for employers
Beyond cash flow concerns, which are detailed below, the main considerations for employers relate to ensuring payroll software is configured in time for the coming changes – including updating, if required.
As of April 2022, you should check that the NI contribution categories and tables within the software are updated with the new rates, as discussed above.
And then, in April 2023, these should be reverted to the existing NI rates.
As of April 2023, you should ensure the new HSC Levy is applied to salaries as and where appropriate.
Because the addition of this third type of tax is a significant change in how payrolls are handled, your payroll software may need a feature update to handle it.
Cloud payroll software will almost certainly be updated in time, but if you rely on older desktop-based software then you may need to apply a patch, or even upgrade to a newer version.
HSC levy’s cash flow considerations for employers
Depending on your business, you will probably find most employees are eligible for the HSC levy, it can be considered an effective 1.25% increase in payroll costs for most businesses.
Associated costs might include the following:
- Reconfiguring, updating or upgrading payroll software. This can be done in-house, in which case staff time and training may need to be budgeted for, or it might require the help of an outside agency.
- Potential pay increases to absorb the cost of the 1.25% reduction in salaries. However, as we discuss later, there are potentially other ways to mitigate the impact from an employee perspective. Pay reviews can be moved closer to the April 2022 introduction date to help manage the introduction of the levy and its impact.
- Communication and education among the workforce. This might include communication with offsite employees or mobile workers. All communications should be timely and, to ensure coverage, may have to be by more traditional methods such as post, which is significantly more expensive compared to electronic communications.
- Internationally mobile workers present technically challenging issues. Assignment costs should be monitored where individuals are subject to UK NICs – that is, where in-bounds are unable to remain in their home country social security system, 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.
What the HSC levy means for employees
Applying the HSC levy means an effective 1.25% cut in take-home pay for employees it applies to. Businesses may consider folding this consideration into annual pay reviews.
To help employees understand that the levy is something not within the control of the business, consider empowering employees to gain a greater knowledge of their salary by offering tools such as mobile apps.
These also allow employees to take control over their working hours, absences, and more.
Communication should be planned for periods leading up to the introduction of the levy, aiming to educate about why the levy was introduced, and what purpose it serves. There will be a tendency to blame the business for the decrease in salary, and basic education can combat this.
Additionally, to soften the blow, businesses may consider focusing on salary sacrifice schemes.
Many employers already offer pension contributions by this method but schemes such as bikes for work 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.
Not all salary sacrifice offerings can be used to reduce taxable pay, though.
Final thoughts on the health and social care levy
The HSC levy comes at a time for businesses who, in April 2023, might find themselves also having to deal with a scheduled increase in corporation tax that was announced earlier this year.
The time between now and the introduction of the levy — both in 2022 and 2023 – provide some time to look at your business structurally and prepare for increased demands on your salary.
The other side of the coin, providing for your employees, also needs to be addressed ahead of time so that there can be no confusion or surprises.
Editor’s note: This article was first published in October 2021 and has been updated for relevance.
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