The Health and Social Care Levy

The Health and Social Care Levy

In every fairness to the Conservative Party (forming the UK Government), at the time of their December 2019 Manifesto, nobody had heard of COVID-19, let alone the terms self-isolation and furlough.  Therefore, it was probably safe to make the pledge:

‘We will not raise the rate of income tax, VAT or National Insurance’

Yet, 07 September 2021 will be remembered as a day when the UK Government had to break this pledge with the announcement of the introduction of the 1.25% Health and Social Care Levy.

The Health and Social Care Levy

The Levy is part of the UK Government’s ‘Build Back Better’ initiative to fund health and social care, also a Manifesto commitment.  However, this is interesting by itself:

  • The Health and Social Care Levy will apply UK-wide, yet,
  • Health and Social Care is a devolved policy (i.e., for Scotland, Wales and Northern Ireland)

So, a broad comparison can be made with the Apprenticeship Levy.  This also applies UK-wide but is all about apprenticeships in England.  The devolved administrations are ‘compensated’ with a bulk amount to spend on their own devolved apprenticeship regimes, monies calculated via the ‘Barnet Formula’.  Here the comparison ends, however.  The Apprenticeship Levy is not calculated on the same income as National Insurance Contributions and, anyway, is an employer-only Levy.

The Levy will be legislated for via the Health and Social Care Levy Bill and has the following 2 impacts:

 

1: Increased Dividend Tax Rates

The Income Tax liability on dividend payments increases by 1.25% from April 2022.  This tax is payable on dividend income above the allowance, currently £2,000.

Practical effects in 2022/23

On income above the dividend allowance:

 

Tax Year Basic rate Higher rate Additional rate
2021/22 7.5% 32.5% 38.10%
2022/23 8.75% 33.75% 39.35%

 

Taking remuneration in the form of dividends remains more attractive than taking a salary.  I wonder if dividends will be bought forward to the 2021/22 tax year before the increase of 1.25%.

Also, the intention is that the Levy will be collected via the National Insurance system in 2022/23, increasing the percentage rates that will revert in 2023/24.  Does this mean that the dividend tax rates will revert in 2023/24 and the Levy collected another way?  In that way, the UK Government would be in a position to say that there was only a temporary rise – even though this rise is permanent, and a ‘new’ tax has been created but named a Levy.

 

2: Increase to National Insurance – then decreased

The introduction of a 1.25% Health and Social Care Levy will be collected via the National Insurance system in tax year 2022/23 only.  According to the ‘Build Back Better’ paper, this will give HMRC time to prepare their systems.  There is no mention of the time it will take software developers.

Practical effects in 2022/23

National Insurance percentages will increase.  That is the long and short of it.  The Levy will be part of Contributions in 2022/23 and will mean the following in regards Class 1, 1A and 1B National Insurance:

 

Tax Year Class 1 Employee

Main / over UEL rate

Class 1 Employer Class 1A Class 1B
2021/22 12% / 2% 13.8% 13.8% 13.8%
2022/23 13.25% / 3.25% 15.05% 15.05% 15.05%

 

The above does not include:

  • The mariner’s categories
  • Table letters B (reduced rate) and C (over State Pension age)
  • Class 4 (self-employed)

However, except for letter C, these will also be impacted by the 1.25% Levy.  Class 2 and 3 NICs are not impacted.

 

The Secondary Threshold

It is also worth saying that the following thresholds remain in place, earnings on which the employer does not have to pay Contributions:

  • The Upper Secondary Threshold (under 21s)
  • The Apprentice Upper Secondary Threshold (apprentices under 25)
  • The Veterans Upper Secondary Threshold (ex-Armed Forces in civilian employment)
  • The Freeports Upper Secondary Threshold (employees in a Great British Freeport)

Also note that the Employment Allowance (currently £4,000 for eligible employers) will continue to be available with the estimation that 40% (around 640, 000) of businesses will not be impacted.

 

Information on Payslips

On 08 September 2021, HMRC’s Software Developer Support Team asked employer to include a generic payslip message throughout 2022/23:

For the 2022-23 tax year, employers should include a generic message on payslips, where possible, to show that this increase in National Insurance Contributions will be for the Health and Social Care Levy. We would encourage all payroll software providers to support employers with this. We’ll provide details of a standard message to be included shortly. Please let us know if you intend to support your customers to include this payslip message.

Several thoughts come to mind not least that this is a significant employment cost for employers (and employees).  The Health and Social Care Levy Policy Paper published on 09 September 2021 indicates that the financial impacts will be set out in the Budget (27 October 2021) but :

The measure is anticipated to have a significant macroeconomic impact, with consequences including but not limited to for earnings, inflation and company profits. Behavioural effects are likely to be large, and these will include decisions around whether to incorporate or not, and business decisions around wage bills and recruitment.

  • The Health and Social Care Levy Bill legislates for the rise in NICs percentages in 2022/23 where the excess will be payable to the National Health Service (NHS)
  • The legislation will make clear the categories of NICs that this applies to. Note that the ‘Build Back Better’ paper makes no reference to Class 1A and Class 1B, yet HMRC’s communications are clear that increased Contributions will apply
  • Check with your software provider about the capability of providing an online payslip message. It is weird (to say the least) that employers are being asked to communicate a UK Government initiative
  • Will employers look to reward staff in other ways such as replacing bonuses with share option schemes? A bonus will attract increased National Insurance because of the Levy being included.  Share schemes will not
  • Will we see the increased use of Optional Remuneration Arrangement schemes / salary sacrifice that reduce the pay subject to National Insurance?

Practical effects in 2023/24

In 2023/24, the Health and Social Care Levy Bill will give us the 1.25% Health and Social Care Levy.  This will be a separate payslip entry and statutory deduction based on the pay subject to National Insurance Contributions.

National Insurance percentages will decrease, again, the long and short of it.  The Levy will no longer be part of Contributions in 2023/24 which means that percentages will reduce to 2021/22 levels:

 

Tax Year Class 1 Employee

Main / over UEL rate

Class 1 Employer Class 1A Class 1B
2022/23 13.25% / 3.25% 15.05% 15.05% 15.05%
2023/24 12% / 2% 13.8% 13.8% 13.8%

 

Instead, a Levy rate of 1.25% will apply to both employee and employer calculated on the earnings on which they would normally pay National Insurance.  This is earnings above the Primary Threshold (employee) and relevant Secondary Threshold (employer).

 

Over State Pension age?

The ‘Build Back Better’ paper is clear (point 80) that the Levy will apply to the earnings of people that are working, regardless of age.  This is work in employment or self-employment.  This is at Regulation 1 of the Health and Social Care Levy Bill that says, ‘pension age restriction provisions are ignored’.

What this means is that someone over State Pension age will not pay the Levy in 2022/23 but they will in 2023/24.

 

Employment Allowance

The paper says that the Employment Allowance ‘will also apply to the Levy’.  That seems to mean that the Allowance is of less value to an eligible employer if they are having to consider NICs plus the value of the Levy.

  • Have a look at the legislation which refers to the Levy as a tax. It is interesting that HMRC can deduct collection expenses from the amount of the Levy that is remitted.  So, it is only after the deduction of these expenses that the balance is remitted for health and social care
  • What about the redesign of forms such as the P60 to include this information? Payslips will have to be able to include the Levy as an additional statutory deduction
  • I guess we are looking at a redesigned P11D(b) that will show a Class1A calculation and a Levy calculation – added together, declared and paid to HMRC
  • Remember that we need to include deemed employees in this as well, as they will have to pay the Levy, together with their deemed employer
  • I think the separation of the Levy from National Insurance will highlight the fact that the Employment Allowance is of less value to the eligible employer
  • Communicate with people over State Pension Age. There is no Levy on the payslip in 2022/23 but there will be in 2023/24
  • Software developers will have to be provided with specifications plus they will have to remove the ‘generic’ message from payslips, which HMRC are asking for in 2022/23 ‘where possible’. This is where I have commented above that employers / developers seem to be doing the communication message of UK Government
  • However, the separation of the Levy from National Insurance will enable the UK Government to say that they have not raised the level of NICs – save for one year. What they will have done is introduced a new tax!

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