28 Oct 2021

Health and Social Care levy: What you need to know

HS Levy Master

As COVID-19 ravaged our health system, the government borrowed £229bn – the highest figure since the end of World War Two – during the period of April 2020 to 2021. Now, as the country looks to brighter times, the looming debt repayment and the funding crisis being suffered by our health system is at the forefront of the government’s agenda.

To assist in funding the increase in expenditure arising from the pandemic, Prime Minister Boris Johnson brought to Parliament the new ruling of the Health and Social Care levy – a 1.25 per cent tax increase to aid Health and Social reforms across England. From April 2022, a large proportion of UK taxpayers will see a rise in their tax and National Insurance liabilities.

Who is affected and for how long?
There are very few groups of people who will be untouched by these changes. Given the time it takes to prepare HMRC systems for a new form of tax and the urgency in which these reforms are needed, the levy will initially be introduced as an increase to dividend and National Insurance (NIC) rates.

In April 2023 a formal legal surcharge of 1.25 per cent will be implemented which will see the rates of NIC reduce back to their current levels but the increase to dividend taxes will remain.

Changes from April 2022
As of next April, the taxes affected by the introduction of the Health and Social Care levy are:

  • Class 1 National Insurance Contributors (NIC) (employees and employers)
  • Class 1A and 1B NIC
  • Class 4 NIC (payable by those who are self-employed)
  • Dividend tax rates

Individuals of pensionable age who are still employed will not be affected by this initial change and landlords could escape the changes altogether on the basis that rental income is not, under current legislation, subject to NIC.

Changes from April 2023
It’s anticipated that the rates of NIC will reduce to their current levels and the 1.25 percent Health and Social Care levy will come into effect. The monetary effect for employees, employers and self-employed will be exactly the same – it’s simply the name of the tax that will change.

Interestingly, those of pensionable age who are still working will be affected by the introduction of the levy in 2023 as it is a brand-new tax in itself. They only escape the charge in the 2022-23 tax year as it has been introduced as an increase in NIC which is no longer suffered once pensionable age has been reached.

What’s the real impact of the levy?
There are no two ways about it – the rate of tax and NIC payable by individuals and businesses is increasing.

One of the questions we envisage will crop up from many business owners and the self-employed over the next six months, especially as the new levy affects dividend taxes, will be “is it still tax efficient to run a business through a limited company?”.

In most circumstances we anticipate that continuing with, or moving to, a limited company structure will continue to be tax efficient, and the benefits of flexibility and asset protection will remain. If, as a self-employed individual, you have been considering the incorporation of your business, the introduction of the Health and Social Care levy shouldn’t alter your plans.

What can businesses and individuals do to mitigate the impact of the levy?
There are avenues businesses can, and should, take to prepare for these changes:

  • Cash flow management
    Plan ahead - ensure that your cashflow/budget forecasts for 2022 onwards consider the 1.25 per cent taxation rise to avoid any nasty surprises or unexpected tight spaces.
  • Review how you reward your employees
    Do you pay your staff bonuses in cash? As the levy will impact most employees, it may be an idea to look to bring those forwards or to consider other tax-free or low-tax ways of providing perks. If tax-free perks are already on your radar but you’re looking for alternative options, the use of salary sacrifice for pension contributions made to an employer scheme could also be considered as this will save NIC for both employee and employer.
  • Consider your earnings
    As a limited company director/shareholder you’ll probably be used to being paid a small salary and large dividends. Although the introduction of the Health and Social Care levy will increase the rate of tax chargeable on dividend income this remuneration structure will, in a majority of circumstances, remain as the most cost-efficient way of drawing funds from your business. The levy doesn’t come into effect until April 2022 so, if cashflow allows, you should consider bringing dividends forward to ensure they are taxed at existing rates. However, do be wary of the impact this could have on your overall tax position: if taking additional dividends could push your overall income above £100,000 or £150,000, you could lose your personal allowance and suffer an effective tax rate of 60 per cent on some of your income.

    Still a little unsure of what the levy might mean for you and your business, or need some help ironing some of the finer details? Get in touch with our team today who will be more than happy to help.

Stephanie Hurst