In September 2021, the government announced plans to introduce a health and social care levy of 1.25 percentage points to be added to UK workers' National Insurance contributions from April 2022.
The Health and Social Care Levy is part of the government's Build Back Better plan to help fund the recovery of the NHS, health and social care from COVID-19.
If you are an employer, employee, or self-employed (and below the State Pension age), you may have to pay the 1.25 percentage points increase in national insurance contributions.
o Class 1 NI (paid by employees)
o Class 4 NI (paid by self-employed)
o Director Dividends
WILL THIS AFFECT ME?
o Are you an employee earning more than £9.5k - YES
o Are you self-employed with my profits above £9.5k- YES
o Do you employ staff (over 21 years old) and their wages are above £8.8k - YES
o Are you a company director who pays yourself dividends - YES
WHAT IF I PAY MYSELF DIVIDENDS?
Dividend income tax rates will also increase by 1.25%.
The following rates apply after you have used your annual £2k dividend allowance and the tax rate will depend on the rate of tax you pay (Basic, Higher, Additional rate).
As with anything as contentious as this, particularly at a time of cost of living increases and other current climate factors, there is some criticism about the way the increase is being explained.
You may have seen that the rise is referred to as a 1.25% as opposed to a 1.25 percentage point increase.
WHAT'S THE DIFFERENCE?
We’ll try and keep it as simple as possible with some examples below:
Note: These are just a few examples and don’t cover all scenarios. Thresholds are based on 2021/22 figures.
It is worth noting that there are different National Insurance rules for directors which we won’t go into, but for further information, go to https://www.gov.uk/employee-directors
I AM AN EMPLOYER, WHAT DO I NEED TO DO?
If you have payroll software such as QuickBooks, your software will automatically add this as a note on the payslips for you and will automatically make the necessary changes.
If you are not sure, we advise you to get in touch with your payroll provider to make sure that the changes will be made so that your payroll figures are correct.
As an employer, HMRC are asking employers to include the message "1.25 percentage uplift in NICs to fund NHS, health & social care." on employees' payslips for the 2022/23 tax year.
You may not have to pay the extra 1.25 percentage increase. See below for some exclusions;
If your employee falls into one of the following categories and earns less than £50,270 (or £25,000 for Freeport employees) per year, existing reliefs will apply for:
1. Apprentices under the age of 25
2. Employees under the age of 21
3. Armed forces veterans
4. Employees in Freeports
WAYS TO MITIGATE OR REDUCE NATIONAL INSURANCE
Prior to the changes coming in, there are some measures you can put in place:
o Employers may wish to consider paying any discretionary bonuses to employees before the levy comes into effect.
o Directors should review their dividend strategy before the 6th of April to see if they are able to take dividends. Note rules relating to dividends
o Employers to review employee benefits such as healthcare to see if savings can be made
o Employers could make greater use of any salary sacrifice arrangements that are currently in place
o Pension contributions for those employees who participate in defined contributions schemes
o Cycle-to-work schemes and any electric
o Ultra-low emission car schemes that employees are eligible to take part in
Finally, and very importantly, small businesses and employers must review their budgets and forecasts to ensure that the additional costs presented by the levy have been fully considered.
These changes are likely to have a considerable impact on a business’ costs, so it is essential to explore as many options as possible and to ensure the required steps are taken to reduce the impact.
HOW LIKELY IS IT THAT THE INCREASE WILL GO AHEAD?
Although there's been pressure to stop the planned increases, there's been no indication that these changes won’t come into effect.
HOW LONG WILL THE TEMPORARY INCREASE LAST?
National Insurance rates will revert to current levels in April 2023 but will be replaced with a new ring fenced Health and Social Care Levy (a 1.25 percentage point increase). This is planned to apply to those who pay Class 1 (employee and employer), Class 1A and 1B and Class 4 (self-employed) NICs and will also be extended to those over State Pension age who are in work. When the new levy comes into effect, National Insurance rates will revert to current levels.
The levy will be administered by HMRC and collected through the current reporting and collection procedures for NICs. Pay as You Earn and Income Tax Self-Assessment.
We will follow this closely and provide further information as and when updates are available.
Note: Figures above are based on current rates at 14/03/22