Boris Johnson, the Prime Minister, made his Health and Social Care Levy announcement to the House of Commons on Tuesday 7th September 2021.

With effect from 6 April 2022, the government will seek to increase U.K. National Insurance by 1.25% to cover the costs of, initially, the backlog in NHS treatments as a result of COVID, and by three years’ time, the creation of a new Health and Social Care levy aimed at social care costs. As a result, the cost of employment in the U.K. is set to increase. 

What are the new measures? 

In the short term, National Insurance (NI) will rise by 1.25% from next April via a change to the National Insurance regulations in Great Britain plus Northern Ireland amendment regulations too. This would allow for a one year measure to increase U.K. NIC for the 2022/2023 tax year. Anything else would need a fundamental change to National Insurance legislation, which parliament is unlikely to have time to achieve within these proposals. (Unlike income tax on employment income, NIC has not been devolved, although spending by the NHS has been). 

From April 2023, this extra payment will become a separate tax - called the Health and Social Care Levy. This is to be payable on earned income. It is intended that this will show up separately on payslips and be an employee and employer cost. This would appear to be similar to the Apprenticeship Levy, but fundamentally different as it has an employee component too, and post retirement component via payroll. There are some practical advantages of applying a Levy style approach rather than as, for example, a different category letter of NIC as it is usually easier to administer. Employers will still however need to have safeguards in place, and programmers will need to accommodate the changes. 

Who will pay the Levy?

The levy,  unlike National Insurance, will also be paid by people who continue to work beyond retirement age as above. This is proposed to be an employee and employer levy. For the employer, this additional cost of employment should attract a corporation tax deduction as an expense, like the Apprenticeship Levy currently does. It will however be an extra cost for employers coming into effect in eight months’ time. There does not appear to be a de-minimis level at which employers will pay, unlike the Apprenticeship Levy which is aimed at the largest employers only. 

Does this only apply to employees? 

No. It also extends the Levy to the self-employed, via Class 4 NIC for 2022/23 and then as a Levy from April 2023 onwards. In addition, it will be interesting to see if the government intends to narrow the gap between employees and workers, especially those in the Gig Economy, and if they too will be within the scope of the new Levy. 

As part of the announced changes, it is also anticipated that shareholders will also have to pay 1.25% more in tax on the profits they make from April 2022 as part of the stop-gap measures. This has to be enacted via the tax rates on dividend income, as introducing a new class of NIC again would be too tricky to achieve within this year. It will be interesting to see if it will be a 1.25% increase for the “employee”/shareholder plus the 1.25% employer levy added to effectively increase rates by 2.5% on top of the current dividend rates. It will also be interesting to see if these measures are only aimed at those companies declaring dividends that are seen to be avoiding National Insurance, eg personal service companies caught by the “IR35” reforms from April 2021, or all dividend income. It currently is aimed at all. 

How much will it cost?

The government has advised that the changes will cost £255 a year for someone earning £30,000, and £505 a year for someone on £50,000. It currently remains unclear as to whether the NIC holidays for young workers and apprentices will be protected, and if the new NIC free ports announced in last year’s budget, yet to come into effect, will still benefit from NIC exemptions. The intention is to preserve these exemptions. 

On the face of it, it looks as if the U.K. NIC rates will go up to 12% + 1.25% for employee contribution levels, then 2% for high earners + 1.25% on earnings above the cap. For employer NIC costs, it appears these will be 13.8% employer NIC, + 1.25% employer Health and Social Care Levy + 0.5% Apprenticeship Levy, to those this also applies to, although the table in the attached refers to a different total levy. 

How much additional funding will it generate?

The changes are expected to raise £12bn a year. The current estimate for social care costs is between 7.5bn and 12.5bn, depending on what assumptions are made. The government has announced that for three years, all the money will go towards easing the NHS backlog, before more of it is moved into social care.

£2.2bn will be made available for Scotland, Wales and Northern Ireland as central funding top ups given to the devolved parliaments under NHS principles. The increased NIC and ultimately the new Levy appears to be intended to remain a central government controlled “tax” measure, like dividend tax, savings tax, CGT, IHT, etc. 

Next steps?

The proposals announced yesterday, will need to progress through the House of Commons, the House of Lords and then for final enactment. In the Queen’s Speech shortly after the 2019 election, the measures were intended to be discussed at a cross party level. It appears this has not happened, and some commentators are speculating that the measures do not have the full support of the Cabinet, nor the party, let alone cross party consensus. The proposals could therefore come in for a bumpy ride, and some refinements may be necessary. 

What is clear is that employers, and employees alike, need to prepare for an increase in National Insurance costs from April 2022, at a time when a number of employers will already be struggling with the costs of employment and retaining employees.

How can A&M help? 

At A&M we can assist as we have experts in social security both here in the U.K., and across the Taxand network. These measures are also likely to impact on assignees and expatriates if they are covered by the U.K. national insurance regime, plus those employees who may now be working remotely as a result of COVID.