On 7 September 2021, the government set out its plan for health and social care and its funding plan. A new health and social care levy is to be introduced in the UK, to pay for reforms to the care sector and NHS funding.
Details of the new plan are set out in the policy paper "Build Back Better: Our Plan for Health and Social Care". This Insight considers the employee tax and incentives aspects.
The government has announced that it will introduce a 1.25% Health and Social Care Levy, based on National Insurance contributions (NICs). This will be ringfenced to fund the investment in health and social care. The government will also increase the rates of dividend tax by 1.25 per cent from April 2022.
Boris Johnson accepted that the new tax breaks a manifesto commitment (namely, the promise not to raise the rates of income tax, NICs or VAT). However, he noted that "a global pandemic was in no-one's manifesto".
The levy will be effectively introduced in two stages, to give HMRC time to update its systems:
Stage 1 – temporary increase in NICs from April 2022
From April 2022, there will be a 1.25% increase in NICs for working age employees, the self-employed and employers.
Stage 2 – levy introduced from April 2023
From April 2023, the 1.25% levy will be formally separated out to become a separate tax on earned income. At that point, NICs rates will return to their current (2021/22 tax year) levels.
The government's policy paper notes that the levy shares the cost of improving the health and social care systems between individuals and businesses across the UK.
The levy will apply to the same population and income as Class 1 (employee, employer) and Class 4 (self-employed, including partners) NICs, and to the main and higher rates.
Existing NICs reliefs to support employers will apply to the levy – including the available reliefs for companies employing apprentices under the age of 25 and all people under the age of 21 (subject to limits). The Employment Allowance (which discounts the smallest businesses’ employer NICs bills by up to £4,000) will also apply to the levy.
The government estimates that around 40% of businesses will not be affected at all by the levy, and that 70% of the money raised from businesses will come from the largest one per cent of businesses – those with at least 250 employees.
HMRC will be responsible for administering the levy, and it will be collected through Pay As You Earn and Income Tax Self-Assessment.
Legislation to introduce the levy (including the temporary NICs increase in 2022) will be published shortly, at which point further detail will be known.
Points for employers
It is important for businesses to note that the 1.25% rise in NICs for the 2022/23 tax year applies to NICs paid by both employers and employees. Overall, the levy is a 2.5% increase in the rate of tax on earnings (compared to an increase of 1.25% for self-employment income), although it is split between the employer and the employee.
The 1.25% increase in employer's NICs will be a real cost to employers, and should be factored in when considering anticipated expenditure from April 2022. As well as the obvious increase in the wage bill, the overall cost of other payments made to employees (such as bonuses) will similarly increase.
For companies operating employee share plans, there will be an increase in the amount of employer's and employee's NICs payable on the exercise of non tax-advantaged or discounted options. Some companies transfer the cost of employer's NICs arising on such awards – although there is relief from income tax for employees who agree to meet such liability, the overall effective rate of tax will increase.
There may be renewed interest in tax-advantaged employee share plans (which offer relief from income tax and NICs for qualifying companies and employees), as well as salary sacrifice arrangements.
Please get in touch with your usual Osborne Clarke contact or one of the experts below if you have any queries or would like to discuss further.