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Health and Social Care Levy: an employment tax perspective

Jonathan Berger Jonathan Berger

The government are to introduce a temporary 1.25% increase in the rates of National Insurance Contributions (NIC) from April 2022 to support the NHS and equivalent bodies across the UK.  From April 2023, this increase will be replaced by the Health and Social Care Levy which will also apply to employees over state pension age.

From an employment tax perspective, these changes will impact Class 1 (employer and employee), Class 1A (benefits and some termination payments), and Class 1B (PAYE Settlement Agreement) NIC.

The NIC increase represents an additional cost to businesses as well as to employees, so it's a good time to consider a few actions which could improve employee engagement whilst reducing employer costs.

Pension salary sacrifice

If businesses already allow salary sacrifice for pension contributions, thought should be given to increasing uptake of this contribution method with, for example, employee communications or through inclusion of bonus payments. 

Any decrease in contractual salary or bonuses will save the company 13.8% currently. This figure will increase to 15.05% from April 2022, assuming the 1.25% Levy follows the same principles. 

Consideration should also be given to the National Minimum Wage and employees would need to be mindful of any impact on pension contribution limits such as the annual allowance. 

Salary sacrifice for other items

This may also be a good time to consider other tax and/or NIC efficient benefits which can be provided to employees as a part of your wider employee reward proposition. This might include intangibles like buying and selling holiday, Cycle to Work or electric vehicles with emissions below 75 g/km.

NIC on the difference in the salary sacrificed compared to the Benefit in Kind (BIK) charge will provide an immediate NIC saving to the company (assuming the BIK value is lower than the amount sacrificed, subject to the Optional Remuneration rules).

Outside of the NIC saving, there are other environmental benefits of electric vehicles (which may align with an organisation’s corporate culture), alongside employee engagement improvement where a suite of benefits is offered. 

Timing of payments in 2021/22

Consideration may also be given to whether discretionary bonuses could be paid earlier (and assuming that businesses are both comfortable doing so and legislation is not introduced to prevent this). For example, a bonus paid in March 2022 rather than in April 2022 is subject to the tax rates of the 2021/2022 tax year and would therefore not be subject to the new increased rate of NIC.

This could also apply to other payments such as on termination.

Other considerations

Payroll departments will need to be ready for the changes. In particular, payroll software and processes will need to be updated to accommodate individuals over state retirement age paying this 1.25% charge from April 2023, as these individuals do not currently pay NICs.

From a global mobility perspective, organisations should consider the increased costs of expatriate assignments and the associated policies in relation to these changes.

There may also be other complexities to consider, such as the impact of NIC transfers on share payments.

We can help you navigate through these new changes. As well as advising on the tax/NIC position, we offer an employee benefits consultancy service and can often save employers money by reviewing the cost and terms of benefits. We can also help you increase return on investment across benefit spend through increased engagement, utilising technology such as employee benefits platforms.

To discuss any questions you have about the increase in the rates of National Insurance contributions and the introduction of the Health and Social Care Levy, get in touch with your regional employer solutions team.