Health and Social Care Levy: increase in employment costs

The Health and Social Care Levy (HSC levy) will be introduced UK wide from April 2022. It will initially be collected through a 1.25% increase in national insurance contributions (NICs) for working age employees, their employers and the self-employed. From April 2023 the HSC levy will be formally separated from NICs (at which point the NICs rates will return to their current levels) and will be extended to apply to individuals who are working above state pension age (such individuals are exempt from NICs). The HSC levy will be paid by employees and the self-employed on their earnings above the NICs primary threshold/lower profits level (currently £9,568 per annum) and by employers on employees’ earnings above the NICs secondary threshold (currently £8,840 per annum).

In addition, from April 2022 the income tax rates on dividends will increase by 1.25% in order to provide further funding for health and social care. This means that the dividend tax rates for basic, higher and additional rate taxpayers will increase to 8.75%; 33.75% and 39.35% respectively. Dividend tax is paid on taxable dividends that fall outside the personal allowance (currently £12,570) and the dividend allowance (currently £2,000).

Further details can be found in the government paper Building Back Better: Our Plan for Health and Social Care. The House of Commons voted in favour of the plans on 8 September.

At a time when many businesses are already facing increased employment costs and individuals are facing increased living costs, the HSC levy adds to the economic pressure. Employers may face calls from employees for higher wages to offset the additional contributions. It will be important for employers to consider ways of reducing their wage bill while maximising employees’ take-home pay, such as through salary sacrifice and tax advantaged share schemes (for further details see our article Incentivising staff is about to get more expensive – putting tax-efficient share arrangements in the spotlight). Employers may also want to consider bringing forward any large bonus payments to ensure bonuses are paid pre April 2022, in order to avoid the additional 1.25% NICs. Similarly, companies with distributable reserves may want to consider bringing dividend payments forwards where appropriate.