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There are already a number of emerging issues to concern employers following the recently announced increase in National Insurance (NI) from April 2022, and the Health and Social Care (HSC) Levy which is due to replace this from April 2023.
The Health and Social Care Levy Bill was introduced to Parliament on 8 September 2021. Based on the Bill in its current form, the HSC Levy will:
- apply to the same earnings as Class 1 NI above the Class 1 NI primary and secondary thresholds;
- also benefit from existing NI reliefs (e.g., for employees under the age of 21, apprentices under 25, qualifying freeport employees, and the employment allowance); and
- be collected via the PAYE system through payroll.
The Bill makes it clear that the increase in NI will only apply for one tax year: 2022/23, as from 6 April 2023 the Health and Social Care (HSC) Levy will replace the top 1.25% of NI in all cases and NI rates will return to their previous percentages (unless the rates change).
It was announced that the current state pension age restriction for primary Class 1 and Class 4 NI will not apply to the HSC levy. This means that the HSC Levy will be payable by pensioners who are still working as employees or are self-employed after 5 April 2023, if they earn over the primary threshold of £9,568 per year.
Salary sacrifice could become an even more tax efficient way of making pension contributions.
The current employer reliefs in place for NI will continue when the NI rise and HSC Levy are introduced. These are zero-rate NI for those employing:
- Anyone aged under 21
- Apprentices aged under 25
- Ex-forces personnel in their first civilian role for up to 12 months
In addition, from 6 April 2022 a zero rate of secondary Class 1 NIC will be available on employees’ wages who work for least 60% of their time at Freeport tax site. This zero-rate will apply up to a new secondary threshold which is expected to be set at £25,000 per year.
It is anticipated that the HSC Levy won’t be payable by the employer on employees’ wages where the zero rate of secondary Class 1 NIC applies.
For small businesses, where their annual employer’s NI liability is less than £100,000, the £4,000 annual Employment Allowance for NI can be used against the new levy as well as NI liabilities for the tax year 2022/23.
However, it is not clear whether the Employment Allowance will be available to set against the HSC Levy from April 2023, when it becomes a separate tax.
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.
Salary sacrifice is an opportunity to incentivise employees to save more for retirement and is often referred to as salary exchange. Offering a salary sacrifice arrangement for staff pension contributions can result in significant savings for both employers and employees.
Most larger UK employers offer salary sacrifice arrangements on staff pension schemes (together with the likes of cycle to work and in the past childcare vouchers). This is where an employee will exchange part of their gross salary in return for a pension contribution. This reduces the NI paid by both the employee and the employer. For this reason, we predict the popularity of such arrangements will dramatically increase, especially in small and medium sized business.
Care has to be taken in setting up a salary sacrifice arrangement and it is not a perfect solution for everyone as it does lower your income, which might affect a mortgage application and state benefits. Employers must ensure that National Minimum Wage is still paid, and often as an employee you are only able to make changes to a salary sacrifice arrangement once a year or when you have a life changing event, such as marriage, divorce or a child.
Finally, as discussed above, next year’s increase will be collected as part of the NI rise, but from 2023 the HSC levy will be a separate line on payslips. We do not know for certain whether salary sacrifice will extend to the HSC Levy and whether HMRC might impose any other restrictions on salary sacrifice in relation to the initial NI rises. We will have to wait and see what the final rules have to say when they are announced.
The new levy will create significant extra employment costs for many businesses – it’s important to analyse the impact it will have on your cashflow and profitability.
Benefits in kind and PAYE Settlement Agreements (PSAs)
The HSC Bill has confirmed that the NI increases will extend to Class 1A NI and Class 1B NI. This means that where an employer reports benefits in kind on a P11D that attract Class 1A NI, then this liability will increase by 1.25% on previous years. This will be the same for Class 1B NI which is paid on PSAs, where the employer settles a liability for their employees. So where an employer provides company cars or medical benefits, or has paid the tax due on staff entertaining or gifts under a PSA, then the increased NI liability could be significant.
As the HSC Levy is based on current NI principles, it should apply to internationally mobile individuals only where they have a NI liability. Where individuals are currently exempt from NI, e.g., those who hold a Certificate of Coverage or A1, then this should apply to the levy as well.
Off payroll working
Individuals operating through their own personal service companies will have to pay the levy on any salary they pay themselves, and if they take their income in the form of dividends from the company, the tax rate on those dividends will also rise by 1.25% from April 2022. The NI increase will include those within the off payroll working rules, where the end client may have to treat the PSC as a deemed employee.
Businesses that already have robust systems in place to review and implement their off-payroll labour/IR35 obligations may consider using contractors to reduce their employer’s NI costs as they expand their workforce. However, there are many risks in doing this and each contractor engagement must be assessed on its own merits as regards the status of the worker.
Six months to plan
As the new levy will create significant extra employment costs for many businesses, it is important to analyse the impact it will have on your cashflow and profitability for 2022/23 and later years.
There are also other employee benefits which have lower tax and NI liabilities, such as introducing electric vehicles, that will be attractive to employees. Incorporating share options and awards into your reward packages instead of bonuses, or as an alternative to pay rises, can be effective in reducing liabilities and costs and used as a way to motivate and retain employees.
Employers have six months to prepare for these increased costs and those who start the process now have the best chance of reducing the cost impact on their business and for their employees. For help and advice on this or any other employment tax issue, please contact Steve Ashworth.