On 7 September 2021, the Government announced the creation of a new Health and Social Care levy which commences from 6 April 2022. For the 2022/23 tax year the levy will be implemented by a simple increase in the rate of Class 1 NIC (including Class1A and Class 1B paid by employers on employee expenses and benefits) and Class 4 NIC. The increase will be 1.25% for employees, employers and the self-employed, so a total increase of 2.5% in respect of employed workers (split between the employer and employee) and 1.25% for the self-employed.
From April 2023, this will be replaced with a new tax - the "Health and Social Care Levy" and will be shown separately on payslips and self-assessment payments. When this takes effect, the 1.25% levy will also apply to those still working above state pension age (who do not pay NIC). Therefore, in 2023/24, NIC rates will return to their current levels. The new levy will apply to the same population and income as Classes 1 and 4 NIC and will be collected via PAYE and self-assessment.
For small businesses, the £4,000 annual Employment Allowance for NIC can be used against the new levy as well as NIC liabilities. Individuals operating through 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.
At this stage, it is not clear whether there will be any change in the thresholds for the different NIC rates for 2022/23 but this should be clarified in the Chancellor’s Budget announcements on 27 October 2021.
Impact on employers
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.
If you do not already offer varied reward packages to employees it will be worth investigating how using these could help you manage your overall employment costs. For example, offering a salary sacrifice arrangement for staff pension contributions can offer significant efficiencies for both employers and employees - read more on Smart pensions here.
There are also other employee benefits which have a low taxable/NICable value such as 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 also be a highly cost-effective way to motivate employees – try our Which Share Plan tool to find the right scheme for your business.
Businesses that already have robust systems in place to manage their off-payroll labour/IR35 obligations may also consider managing future expansion through use of contractors to reduce their employer NIC costs. However, there are many pitfalls for the unwary and each contractor engagement must be assessed on its own merits – read more on off-payroll labour here.
Employers have six months to prepare for these increased costs and those who start the process now have the best chance of limiting the negative impact on their business. For help and advice on this or any other employment tax issue please contact Caroline Harwood, John Chaplin or Steve Talbot.