The Health and Social Care Levy Act 2021 (the levy) was introduced to pay for an increase in funding for health and social care. The implementation of the levy will occur in two stages, both of which will have considerable consequences for charities. So, what do charities need to know about the change, and what steps are available to help mitigate any impact?
According to the Office for Budget Responsibility, the levy is expected to raise £36bn over the next three years, with the monies initially earmarked to support the NHS and then to help the care sector. As National Insurance contribution (NIC) is not a devolved tax, it will apply to the whole of the UK.
IR35 legislation will also be affected by the changes, with the charge being included within the deemed employment tax and NI calculations for workers who are engaged by the fee payer.
The two stages
The levy is being implemented in two stages to give HMRC time to update their systems. Firstly, from 6 April 2022, there will be a temporary 1.25% rise in NIC for employees, employers, and self-employed individuals. This means that both Class 1/1A and 1B NIC rates will rise to 15.05% for charities. HMRC is requesting that employers, where appropriate, include the following message on payslips: ‘1.25% uplift in NICs, funds NHS, health & social care’.
A separate levy, known as the Health and Social Care Levy, will then be introduced for the 2023/24 tax year, which will be shown separately on employees’ pay slips. This new levy will apply to both the charities and employees at a rate of 1.25% – a combined levy rate of 2.5%. Class 1/1A and 1B rates will revert back to their normal levels. However, when the levy is a standalone charge, it will continue to be charged on benefits attracting employer NIC liability (i.e. Class1A/B NIC). Employees over State Pension age will also be liable to pay the new levy, unlike ordinary NIC.
Overall, the new levy is expected to increase the monthly NIC bill of the average employers by approximately 10%, a considerable cost on top of the inflationary pressures in addition to reduced income that many charities are currently experiencing.
Steps to mitigate the impact of the levy
However, there are a number of steps that charities can take to reduce the impact of the levy before it comes into effect on 6 April 2022. Firstly, charities may wish to utilise the current Employment Allowance (the allowance) of £4,000 per tax year, if applicable. The allowance can be used to offset the employer’s Class1 NIC. The allowance can be claimed if your employer’s NIC was less than £100,000 in the previous tax year.
Despite calls by various charities and small businesses for the Government to increase the allowance to mitigate the levy, there has been no movement to date.
Charities may wish to review or make greater use of any salary sacrifice arrangements that are currently in place, including pension contributions for those employees who participate in defined contributions schemes, cycle to work schemes and any electric and ultra-low emission car schemes that employees are eligible to take part in.
If charities do not have any schemes of this kind already in place, they should consider implementing them to reduce the earnings of employees upon which the levy will apply. Furthermore, both pension and electric car salary schemes are good retention and recruitment tools for charities to utilise.
Existing policies, such as private medical care, should also be reviewed to identify any cost savings, whilst charities should consider making greater use of tax-exempt benefits such as annual medical check-ups.
Finally, in addition to taking steps to mitigate the impact of the levy, charities 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 therefore vital that all options are explored, and the required actions are taken to reduce the effects.
For further information on the above, contact Dinesh Pancholi, Employment Tax Senior Manager, or your usual haysmacintyre contact.