The government aims to raise £12billion by introducing a new 1.25% levy on both earned income and on employers’ wage bills to raise funds for the NHS and adult social care.
From April 2022, the new Health and Social Care Levy (HSCL) comes into effect. It might be called a levy, but the HSCL is really an additional tax on employers and employees. It will be collected via National Insurance contributions in 2022/23 and as a separate deduction on payslips from April 2023.
The new levy will be paid by taxpayers across the UK, as the levy and dividend tax rates are UK-wide taxes. Normally, the devolved administrations have autonomy over how to spend any additional resources they are provided through the Barnett formula. However, as the money raised by the levy is ringfenced for health and social care, the Westminster government will require that the extra money is spent on health and social care in the devolved nations too.
Who will pay the Health and Social Care Levy and how much will they pay?
From 6 April 2022 all rates of National Insurance for both employees and employers will increase by 1.25%.
For employees this equates to a 10.4% increase on the main band of earnings and a 62.5% increase in the top rate above the Upper Earnings Limit.
For employers it’s a 9% increase that will also apply to Class 1A on benefits in kind, Class 1B on items within a PAYE settlement agreement and the in-year Class 1A on termination payments exceeding £30,000.
No additional employees will be drawn into the scope of the increasing National Insurance in 2022/23, but from 6 April 2024 employees who are above state pension age who are exempt from National Insurance will begin to pay the HSCL. This will be shown as an additional line on payslips along with the other statutory deductions.
So, with a 9% increase in the cost of employment on the horizon, are there any ways to help to mitigate this cost increase? Not forgetting that there is also going to be a significant increase in national minimum wage too.
Here are five useful Advice Points which could indeed help to lessen the impact for employers and employees alike.
Advice Point 1 – Salary Sacrifice
If you haven’t yet embraced all/or any of the opportunities which encourage your employees to sacrifice earnings in exchange for an employer-provided benefit in kind, now is a very good time to investigate this.
Any reduction in earnings will save 15.05% employer National Insurance and 0.5% of apprenticeship levy (and from next year 1.25% HSCL). Whilst changes to salary sacrifice were introduced in April 2017 that make some benefits provided this way less cost effective, the government created certain benefits from those changes when optional remuneration arrangements were introduced, and these are still very attractive to employers and employees:
• Pension contributions and workplace pension advice.
• Cycle to work schemes, if employees are travelling to work and can meet the 50% qualifying journeys condition.
• Annual leave purchase.
• Cars with emissions below 76 g/km.
However, do remember that if you are reducing pay as a salary sacrifice you must ensure that employee earnings do not drop below the new value of national minimum wage from April 2022 and that employee contracts are amended to indicate a reduction in pay.
Advice Point 2 – Bring forward Terminations
With the 1.25% increase in real time Class 1A on termination payments more than £30,000, if you have any senior leavers who are due to depart in April with significant termination packages. It makes financial sense for both employee and employer to bring forward that leave date to March 2022 to avoid the increase in National Insurance.
Advice Point 3 – Utilise National Insurance Exemptions
In recent years the National Insurance system has been used to incentivise employers to behave in a certain way, with the introduction of exemptions from employer National Insurance.
For example, in April 2021 an exemption was introduced to encourage the employment of veterans as they move from military to civilian life. Another is due to be introduced in April 2022 as the government plans to create several geographic freeports across the UK. If an employee spends at least 60% of their time in this geographic area, then the employer will not pay employer National Insurance up to a ceiling of earnings of £25,000.
The same exemptions will apply to the HSCL in April 2023, so it makes sense to reduce overall costs by utilising all employer National Insurance exemptions that are available:
• Employees aged under 21
• Apprentices aged under 25
• Veterans in their first 12 months of civilian employment
• Employees within a Freeport area
Advice Point 4 – Share Incentive Plans
There is no concept of National Insurance relief in the same way as there are tax reliefs. The only way to pay less National Insurance is to earn less, hence the attractiveness of salary sacrifice. However, the one exception to this is the way that share incentive plans (SIPs) operate. Employees are encouraged to buy shares in their own company because these reduce pay for both tax and National Insurance, although we do not know if the government will also encourage share ownership by allowing SIP deductions to reduce pay for HSCL.
Advice Point 5 – Employment Allowance and Statutory Payments
One of the casualties of the increase in National Insurance could be that small employers will no longer qualify for the employment allowance in 2023/24 if their National Insurance for 2022/23 goes above £100,000. If the government doesn’t include the HSCL in determining the employment allowance threshold, we could have the strange situation of employers who lose out in 2023/24 finding that they are able to claim again in 2024/25, as National Insurance rates drop by 1.25% in April 2023 back to previous levels. In respect of statutory payment recovery, the smallest of employers with an employer National Insurance liability of no more than £45,000 can recover 103% of statutory payments, they may also breach this threshold in 2022/23 but then return to 103% recovery rate from 92% (which is the rate for large employers) in 2023/24.
As you can see the introduction of the new HSCL poses many questions and a lot of calculations will need to be made to help to minimise the cost impact of the introduction of HSCL for both employees and employers.
But ahead of April, there are undoubtedly options available which can lessen the impact on both businesses and employees, and we hope that this article is useful.
As payroll experts, please do not hesitate to contact our team for further advice about the new Health and Social Care Levy, so that we can help you to identify what’s right for you and your individual situation.
By Joanne Gibson, Partner and Head of Payroll