This April, a new tax rise is coming into effect, in the form of the first stage of the planned Health and Social Care Levy (the levy). The Government has resisted all calls to abolish the increase, including a symbolic non-binding motion that was passed in the House of Commons on March 9 2022.
Much has been made of the significant impact the introduction of the levy will have on employees – it will, however, also have substantial consequences for employers.
So, what are the changes that are about to come into effect, and what steps can businesses take to reduce the impact of the levy being introduced?
The two-stage process
To give HMRC enough time to update their systems, the levy will be introduced in two stages. From April 6 2022 there will be a temporary 1.25 per cent percentage point rise in National Insurance Contributions (NIC) for both employees and employers, as well as for self-employed individuals. Additionally, there will be a rise of 1.25 per cent for dividend income tax rates.
For employers, Class 1/1A and 1B NIC rates will rise, reaching 15.05 per cent. HMRC have been in touch with businesses to suggest that they print a message on payslips that states: ‘1.25 per cent uplift in NICs, funds NHS, health and social care’. This move has been criticised, with some businesses arguing that the job of their HR departments is not to promote, or defend, a government tax rise.
From the 2023/24 tax year, a separate tax known as the levy, is due to be introduced, with NIC rates reverting back to their March 2021 levels. This new levy will appear separately on payslips and will apply to both the employer and employee at a rate of 1.25 per cent percentage points for each, resulting in a combined levy rate of 2.5 per cent.
However, benefits that attract employer NIC liability will continue to be subject to charges even when the levy is a standalone charge. Although one key difference from regular NIC to be noted is that employees over pension age will be subject to, and have to pay, the new levy.
The plain financial impact
According to the Office for Budget Responsibility, the levy will raise £12.4bn a year for the next three years to pay for increased funding for health and social care, aiming to relieve the burden on the NHS.
The average employer should expect to see their monthly NIC bills increase by roughly 10 per cent, as a result of the changes. The Federation of Small Businesses’ (FSB) independent analysis puts the additional cost for employers at £3,000 p.a. This, coupled with the rises in National Minimum/Living wage, reduction in government support and removal of lower rate of VAT in the hospitality sector will add a considerable cost – especially given that businesses are currently facing high levels of inflation and rising prices across many areas. The FSB has asked the Government to consider providing support to mitigate the levy costs, such as increasing the employment allowance to £5,000 and adjusting the business rates criteria so up to 200,000 small businesses are exempt.
National Insurance Contributions (NIC) is not a devolved tax, so it will apply to the whole of the UK. IR35 legislation will also be affected by the changes, with the charge being included within the deemed employment tax and NIC calculations for workers who are engaged by the fee payer.
Reducing impact: what steps can be taken?
Before the changes come into effect on April 6, businesses have an opportunity to move swiftly and mitigate the impact of the planned tax rises, with a number of options available. Firstly, employers should consider the possibility of paying employees any discretionary bonuses before April 6 2022.
Furthermore, a sensible step for employers to take would be to increase the usage of salary sacrifice arrangements that businesses currently have in place. If businesses have no such arrangements in place, it would be wise to review this. This includes cycle to work schemes and any car schemes for electric or ultra-low emission vehicles that employees can use, as well as pension contributions for employees participating in defined contributions schemes.
The implementation of these schemes if they are currently lacking would have significant benefits for businesses, as this would reduce the earnings of employees, who are subject to the levy. Aside from the tax benefits, schemes of these kinds can also pay dividends as retention and recruitment tools – worth keeping in mind for employers, especially given the current talent shortages in various industries.
It is also worth implementing reviews of any share incentive schemes employers currently have in place. Given that employees are required to pay the employers Class 1 NIC liabilities in some of these schemes, some elective options may need to be updated or amended to include the upcoming levy for 2023/24. Moreover, a wise move would be for employees to switch out bonuses, or pay rises, and instead consider the use of share schemes that come with greater tax advantages.
Employers may have employees on secondment, perhaps from the UK to countries where the UK does not have a formal social security agreement in place. In these cases, the employees’ NIC situation should be reviewed. If there is a secondee that has arrived from countries with whom the UK does not have a reciprocated social security agreement, an option may be to employ the secondee locally before they are seconded – this would reduce UK NIC liabilities during the first 52 weeks of the UK secondment.
The importance of reviewing existing policies cannot be overstated – herein lies tax savings. For instance, private medical care could be reviewed to identify cost savings. An additional route to consider would be the use of tax-exempt benefits which could include, but are not limited to, annual medical check-ups and the introduction of services and goods discounts. If it is possible to declare dividends, and pay them, before 6 April 2022, then businesses should also contemplate doing so.
All businesses should also look to undertake a comprehensive review of budgets and forecasts and – once this is done – the areas in which savings can be made will become more apparent.
The introduction of the Health and Social Care Levy next month is likely to add significant costs onto all employers UK-wide. There are steps that employers can take to ensure that the introduction of the levy is made much more manageable. However, with the clock ticking until the changes come into force, the time to act is now.