Introduction of the new Health & Social Care Levy and how it works

social care

Last week saw the introduction of the new health and social care Levy.  Whilst this came as a surprise to many it was not all that unexpected.  The UK with its aging population has over many years debated on how to deal with the rising cost of social care.

It took the pandemic (and the immense pressure on the NHS) to bring some urgency to this question so here we are. After its third reading in Parliament last Tuesday, the Health and Social Care Levy Bill was passed by MPs with a majority of 56 votes.

The new levy will increase contributions from National Insurance and dividends and will raise an extra £36bn for the frontline services over the next three years.

Who is going to be affected by the changes

There will be a 1.25% temporary rise in National Insurance Contributions (NIC) from April 2022 paid by both employees and employers.  The increase also applies to Class 4 contributions paid by the self-employed.

So, employers will pay NIC at 15.05% and employees will pay 13.25% and if currently paying the extra 2%, this will now also change to 3.25%.

The national insurance paid by employers on employee benefits when completing forms P11d will also increase to 15.05%

For those operating through a company, paying yourself a small salary and a larger dividend will also be caught by this new tax.  This means that after the £2,000 tax free dividend, the rate will now be 8.75% for the basic rate taxpayer, 33.75% for the higher rate taxpayer and 39.35% for those earning over £150,000.

From April 2023 the New Health and Social Care Levy (HSC Levy)

From April 2023 it will become a separate tax on earned income at the same rate of 1.25%. It will be calculated in the same way as NIC but will be shown separately on the payslip or on the self-assessment calculation.

This new tax will be referred to as the Health and Social Care Levy (HSC Levy). 

The levy will operate in the same way as NIC and therefore the same thresholds will apply.  It will be collected via the PAYE system through payroll or via self-assessment.

What is different however, and well worth remembering, is the levy will also apply to those above the state pension age on any earned income. But it does not apply to any investment income such as pensions, investments, and rental income.

Impact of the New Health and Social Care Levy

Employers, employees and the self-employed will be impacted by the increase in NIC or tax on dividends.

If you are self-employed and are just paying Class 2 or 3 NIC, you will not be caught by the new rules.

For those employers (around 640,000) entitled to the employment allowance will not have pay the extra levy. Meaning if you are currently not paying any employers NIC because it is covered by the £4,000 annual employment allowance, you will not have to pay the extra tax if the employer NIC (together with the 1.25% levy) still remains under this amount.

What should I do?

  • To start with, the cost of employing staff is going to increase at least by 1.25% on top of the inflationary wage rise. So, make sure this new tax is included in your budgets and forecasts going forward from next April.
  • You may want to consider offering your employees salary sacrifice options on pension contributions, childcare, and cycle to work schemes in order to save the NIC next year.
  • If you take regular dividends you may want to consider the timing of the dividends as we approach next April.
  • Talk to us on any of the above if you have questions.

Budget Date is set for the Autumn 2021 Budget

There was also another important announcement made at the same time, a date for the Autumn Budget.  A full spending review alongside an Autumn Budget will held on 27th October.

Commentators are already saying the HSC levy will fall greater on the middle to lower income earners.  So, will the next budget be just all about departmental budget restrictions or will we see sweeping tax changes?

There are those who think the Chancellor should perhaps increase wealth taxes such as Capital Gains Tax (CGT) and or Inheritance Tax (IHT) to be seen to fair.  Corporation tax set to increase to 25% from April 2023 is largely ring-fenced.

Could we therefore perhaps also see a diversion from the manifesto promises (because no manifesto included the outbreak of Covid-19) and see changes coming to income tax and VAT?

If you have any questions about the new 1.25% tax please email your normal contact or Priya at priyar@myersclark.co.uk

 

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