The Health and Social Care Levy – Why, When and How

Following on from the Coronavirus Pandemic and the Government’s commitment to improve and reform Health and Social Care Services within the United Kingdom the government has formally announced its much anticipated plan for health and social care and its funding. A new health and social care levy is to be introduced in the UK, to pay for reforms to the care sector and NHS funding.

Details of the new plan are set out in the policy paper “Build Back Better: Our Plan for Health and Social Care“.

The government has announced that it will introduce a 1.25% Health and Social Care Levy, based on National Insurance contributions. This will be ringfenced to fund the investment in health and social care.

Whilst the Health and Social Care Levy is based on National Insurance it is a separate tax due to the fact that it is ringfenced only for Health and Social Services.

The levy will be effectively introduced in two stages, to give HMRC time to update its systems: –

Stage 1 – temporary increase in NICs from April 2022

From April 2022, there will be a 1.25% increase in NICs for working-age employees, the self-employed and employers.

Stage 2 – levy introduced from April 2023

From April 2023, the 1.25% levy will be formally separated out to become a separate tax on earned income. At that point, NIC rates will return to their current (2021/22 tax year) levels.

The government’s policy paper notes that the levy shares the cost of improving the health and social care systems between individuals and businesses across the UK.

The Health and Social Care Levy Within Employment

It is important to note that The Health and Social Care Levy applies to both Employee and Employer National Insurance Contributions.

Therefore the 1.25% Levy will be deducted from the employee’s pay once the employee’s pay reaches the specified threshold per pay period and the 1.25% Levy will increase the Employer’s National Contribution on behalf of each employee once the employee’s pay reaches the specified threshold per pay period.

However, the 1.25% increase in employer’s NICs will be a real cost to employers and the 1.25% increase in employee’s National Insurance Contribution (deducted from the employee’s gross pay) will be the real cost to employees.

The employer will pay both the employee’s and employer’s Health and Social Care Levy to HMRC as an inclusion with the amount of PAYE and National Insurance paid.

This is important to note for purposes of cash-flow planning and budgeting with these payments being higher because of the Health and Social Care Levy.

This makes reviewing prices charged to customers on a regular basis even more crucial and important to the success of a business and it is important to be aware that prices charged by suppliers of goods and services to their customers may increase as they review their own prices in line with the increasing costs.

Existing NICs reliefs to support employers will apply to the levy – including the available reliefs for companies employing apprentices under the age of 25 and all people under the age of 21 (subject to limits). The Employment Allowance (which discounts the smallest businesses’ employer NICs bills by up to £4,000) will also apply to the levy.

Employees Above State Pension Age

At present employees above State Pension age are exempt from paying National Insurance Contributions on their employed income.

However, upon the separation of the Health and Social Care Levy from National Insurance Contributions from April 2023 employees above state pension age will be required to pay the Health and Social Care Levy of 1.25% on their employed income and the employer will be required to contribute the same about.

The Health and Social Care Levy for the Self-Employed

The Health and Social Care Levy will also be applied to National Insurance paid by the Self-Employed and members of partnerships.

Again, the levy will effectively be introduced on two stages, to give HMRC time to update it’s systems: –

Stage 1 – Temporary increase in NICs from April 2022

From April 2022, there will be a 1.25% increase in Class 4 National Insurance contributions for those who are Self-Employed and of working age.

Stage 2 – Levy introduced from April 2023

From April 2023, the 1.25% levy will be formally separated out to become a separate tax on earned income. At that point, NICs rates will return to their current (2021/22 tax year) levels.

Self-Employed Individuals above State Pension Age

At present self-employed individuals above State Pension age are exempt from paying National Insurance Contributions on their employed income.

However, upon the separation of the Health and Social Care Levy from National Insurance Contributions from April 2023 self-employed individuals above state pension age will be required to pay the Health and Social Care Levy of 1.25% on their profits for the year once the Class 4 National Insurance Threshold is reached.

The Health and Social Care Levy and its Effect on Dividend Tax

Because Shareholders of Limited companies earn income and pay tax on dividends paid out of the profit of the company the government will also increase the rates of dividend tax by 1.25 per cent from April 2022.  Listed below is a table illustrating the changed Dividend Tax Rates compared to the current Rates.

The £2,000 Dividend Allowance will remain, and Dividends earned within Individual Savings Accounts (ISA) will remain excluded from Dividend Tax.

Because National Insurance is not levied on Dividend Tax there will be no separation of the Health and Social Care Levy from the increased Dividend Tax from April 2023.

Further Assistance 

If you have any queries about the Health and Social care levy please do not hesitate to contact us and we will be glad to assist you.