Key Takeaways
1. The UK government has introduced a new levy which will initially be paid through National Insurance contributions. The new levy is called the ‘Health and Social Care Levy’ (also known as the ‘health and social care tax’), and will result in a tax increase of 1.25% for UK employees, employers, and self-employed individuals.
2. Health and Social Care tax will be implemented in April 2022 which will mean that National Insurance contributions will rise to 13.25% for those affected. After April 2023, Health and Social Care contributions will then be an individual legal surcharge in its own right.
3. For many, this will come as devastating news as no-one welcomes extra taxes. However, as a result of Covid and the pressures that have been placed on the National Health Service (NHS), the UK government have reported that this levy is necessary to help the people of the UK and to maintain the strength of the NHS.
4. In order for companies to comply with UK tax laws, these mandatory contributions must be made through the PAYE system for applicable employees. UK businesses will also be affected by the hikes in taxes as they have to pay taxes based on the salaries of their employees.
As a result of the global pandemic, the UK government has introduced a new Health and Social Care Levy in an attempt to raise funds for the NHS and other UK care bodies. The changes will be made in line with the new UK tax year which will start in April 2022.
The plan is that the Health and Social Care tax will be set at a rate of 1.25% through National Insurance contributions starting from April and then in 2023, National Insurance levels will return to previous rates. The Health and Social Care Levy will then take effect as its own separate tax of 1.25%.
What is the Health and Social Care Levy?
On 7th September 2021, the UK government proposed The Health and Social Care Levy Bill 2021-22 for new plans to fund health and social care. This consisted of introducing a new levy in April 2022 called the Health and Social Care Levy, with the aim of bringing in an additional £12 billion per year.
The Bill was suggested as a result of the pandemic which has caused devastating blows to the UK economy and national health. As a result, from 6 April 2022 to 5 April 2023 National Insurance contributions are due to increase by 1.25% which will be spent on the NHS and social care in the UK. The National Insurance rate is already set at 12%, therefore, individuals will need to pay a total of 13.25% in National Insurance contributions.
The tax deductions will be taken through the PAYE system and will be reflected in employee payslips: Employers in the UK pay their employees through a system called “pay as you earn” (PAYE) (Read more at our Ultimate Guide to UK Employment Law). Rather than having to pay their own taxes, employers pay them on behalf of employees through PAYE directly to HMRC.
What is National Insurance?
The Health and Social Care Levy will be based on National Insurance contributions. In the UK, compulsory payments called National Insurance tax deductions are made by employees, employers and self-employed people.
Under UK employment law, employees over the age of 16 are legally required to pay National Insurance (NI) which is similar to social security. If employees are earning more than £184 per week or self-employed individuals are making a profit of at least £6,515 a year they must pay NI. The amount that a person must pay towards National Insurance varies depending on their employment status and level of income. The Social Security Contributions and Benefit Act 1992 lays out categories called National Insurance “classes.”
The general National Insurance rates for the tax year 21-22 are the following:
- Those who earn £184 to £967 a week will pay 12% towards National Insurance
- Those who earn over £967 a week will pay 2% towards National Insurance
Why is the Health and Social Care Levy being introduced?
The aim of the levy is to be able to supply more funds for the NHS and other care organisations. Due to the Covid-19, the UK government has had to put up funding in order helping the economy stay afloat. The tax increase is being implemented as a long-term funding solution and to ease pressure on the national health services.
The Health and Social Care Levy has come about as part of the government’s plan to “build back better” after Covid. During the midst of the pandemic, many thousands were admitted to hospital and the need to treat Covid patients overrode the requirement to assist others. As a result, it is said that more than 5.5 million people are awaiting tests and surgery. In light of this, the govnerment has made the decision to incur an extra tax to “support the NHS, reform adult social care and create a new integrated system between health and social care” with the aim of improving lives.
Who does the new Health and Social Care Levy apply to?
There is no doubt that businesses and individuals will be impacted by the new Health and Social Care Levy. It will affect employees who are liable for Class 1 National Insurance contibutions and self-employed individuals who are liable for Class 4 National Insurance contirubitons.
Put into context, from April 2022, those employees who earn above the Primary Threshold and Lower Profits Limit (£9,568 in 2021 to 2022 tax year) will need to pay the Levy. Therefore, those earning below this threshold will not be required to pay the new Levy.
In the tax year 2022 to 2023, a person earning the median basic rate of taxpayer’s income of £24,100 would need to pay an additional £180; and an individual earning the median higher rate of taxpayer’s income of £67,100 would have to pay an additional £715.
The Health and Social Care Levy will essentially be a 1.25% rate on all income earned above the Primary Threshold, therefore, the higher a person’s earnings, the more they must pay in taxes.
There are concerns that the levy will have the greatest impact on the lowest-paid in society. It is expected that the increase in National Insurance will affect those who are already struggling to support themselves financially.
In terms of UK-based businesses, they will likely be impacted in a number of ways: Payroll software systems may need to be updated to reflect the change, but this will be the least of their worries. Employers must also pay National Insurance contributions for employees earning above £8,840 (for tax year 2021-22) which is called the “secondary threshold”. From April 2022, employers will be hit with paying 15.05% on each salary above this threshold.
For self-employed people, the Health and Social Care tax will be paid on profits over £9,568 (for tax year 2021-22). Self-employed individuals will have to declare their own income and business expenses and will be liable to pay the new levy, alongside their other compliance obligations (such as complying with the new IR35 and off-payroll working rules).
How does the new Health and Social Care Levy affect employee pay?
Essentially, the more an employee is paid, the more they will be taxed (with amounts deducted and withheld by the employer — read more about this system at our Guide to Employee Benefits in the UK. The National Insurance rate is already set at 12%, therefore, from April 2022, individuals will need to pay a total of 13.25% in National Insurance contributions. Employees may notice that their usual monthly earnings have decreased, however in reality, as the contributions are taken through the PAYE system, they may not feel as though money has been lost as such, as they won’t have seen it in the first place.
Conclusion
For businesses that operate in the UK or hire UK employees, the new levy must be considered, as ultimately it is the responsibility of the employer to ensure that the correct contributions are made. Making the correct employee deductions is just as important as following any other employer obligation, such as the obligation to comply with the rules for employee redundancy in the UK.
If you require expert advice or support in relation to making mandatory tax contributions for employees in the UK, at Horizons we are able to assist. For more information or guidance, please do not hesitate to contact us.
Frequently asked questions
From 6 April 2022 to 5 April 2023 National Insurance contributions are due to increase by 1.25% which will be spent on the NHS and social care in the UK. Then, from 2023 the Health and Social Care Levy will be put in place as its own separate tax. This is applicable to those employees who earn above the Primary Threshold and Lower Profits Limit (£9,568 in 2021 to 2022 tax year). How much a person earns will dictate the amount that will need to be paid.
All UK employees, employers, self-employed people, and also (from April 2023) workers over the State Pension Age will need to pay the Levy. This will affect those living in England, Scotland, Wales, and Northern Ireland.
