Health and social care levy – how might employers and business owners respond? - PKF Francis Clark
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Health and social care levy – how might employers and business owners respond?

Boris Johnson has today announced the Government’s long-awaited plan for health and social care and how it intends to pay for it.

Here we summarise the key changes and how employers and business owners could mitigate their impact.

Health and social care levy at a glance:

  • 1.25% rise in National Insurance from April 2022
  • From April 2023 onwards, this new health and social care levy becomes a separate tax on earned income, with NI rates returning to their current level
  • Workers over the state pension age, who currently don’t pay National Insurance, will have to pay the 1.25% levy
  • Tax rates on dividends will also increase by 1.25% in April 2022

How much will it cost?

The 1.25% levy equates to an increase in employee National Insurance contributions (NICs) of:

  • £130 a year for a worker earning £20,000 (£139 in employer NICs)
  • £255 a year for a worker earning £30,000 (£264 in employer NICs)
  • £505 a year for a worker earning £50,000 (£514 in employer NICs)
  • £880 a year for a worker earning £80,000 (£889 in employer NICs)
  • £1,130 a year for a worker earning £100,000 (£1,139 in employer NICs)

Our key takeaways: 

  • The 1.25% increase in NICs applies to employers as well as employees
  • Businesses will need to budget for these additional employer’s NI costs from April 2022 onwards
  • Existing reliefs on NICs, including the employment allowance, will also apply to the levy
  • People who are self-employed will also see their Class 4 NICs increase by 1.25%
  • Business owners may want to bring forward planned dividends before the 1.25% tax rise takes effect in April 2022
  • Dividends will continue to be more attractive than salary as a means of taking profits from companies, especially for higher earners, despite the planned increase in corporation tax to 25% in 2023
  • Employers may want to look at share option schemes rather than bonuses for higher earners
  • Salary sacrifice could become an even more tax efficient way of making pension contributions, as this reduces the salary on which employee and employer NICs are paid

It’s worth noting that the 1.25% increase in dividend taxes applies to all businesses. There is no attempt to distinguish between dividends from owner managed companies and larger corporates – it’s a sweeping change.

The rise in tax on dividends came as something of a surprise, apparently to fend off accusations that the widely trailed increase in NI would unfairly place the burden of funding health and social care on those who receive their earnings in the form of a salary.

Dividend tax rates in 2022-23 will still be lower than the corresponding income tax rates: 8.75% at the basic rate; 33.75% at the higher rate; and 39.35% at the additional rate.

The health and social care levy is expected to raise £36 billion over the next three years, with the bulk of this being used to help the NHS catch up on the treatment backlog that has grown during the pandemic. Several commentators have already questioned whether it’s realistic to expect the NHS’s funding needs to decrease in future so that more of the levy goes into funding social care.

Once it is separated out from National Insurance, the hypothecated – or ring-fenced – health and social care levy could be a more politically palatable tax for governments to increase in future. If and when this happens, would tax on dividends rise accordingly? At this stage we can only speculate.

The health and social care levy introduces more complexity to the tax system and another deduction for payroll teams to administer.

It will also be interesting to see how the levy interacts with salary sacrifice when it is a standalone tax. Given the need to raise revenue, the Government could look to restrict methods for reducing NI, apart from the employment allowance and reliefs for employers of apprentices under 25, employees under 21, veterans and those located in freeports.

Extending the levy to those over state pension age, who don’t currently pay employee’s NI (though employer’s NI continues to be due), means that as the state pension age increases and people work for longer, they will now have to make a continuing contribution. This could make some jobs more marginal for those over retirement age, at a time when expanding the domestic workforce has an important role to play in tackling labour shortages.

More details can be found in the Government’s plan for health and social care document.

FEATURING: Stuart Rogers
Stuart is a corporate tax partner who specialises in advising fast growing and complex corporate entities, heading up the innovation and technology tax services group… read more
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