Health and Social Care Levy – what do you need to do?

The Government has confirmed that the planned increases to NICs will go ahead in April 2022

In September 2021, the government announced plans to increase funding for the NHS, health and social care by:

• temporarily increasing national insurance contributions (NICs) rates from 6 April 2022; and
• introducing a new health and social care levy (Levy) to take effect from 6 April 2023.

Despite recent speculation that the government may defer those plans, it’s understood that the government is still committed to increasing the NICs rates and introducing the Levy.

In this Insight, we look at how the NICs rates increases and the Levy will affect employers and what steps employers should take to ensure that their employees are aware of the changes and that the correct deductions are made from relevant payments made to their employees.

When do the changes take place?

Although the Levy will not apply until 6 April 2023, employers and employees will both be required to pay an increased rate of Class 1 NICs from 6 April 2022.  In addition, employers will also pay an increased rate of Class 1A and Class 1B NICs from the same date.

How much is the NICs increase?

The increase in Class 1, Class 1A and Class 1B NICs will be 1.25%. 

This means that from 6 April 2022, employees below the State Pension Age will pay employee Class 1 NICs at a rate of 13.25% on pay over £797 per month and at a rate of 3.25% on pay over £4,189 a month. 

Employers will pay employer Class 1 NICs at an increased rate of 15.05% on pay over £737 per month. 

When will the NICs increase end?

The increase in Class 1, Class 1A and Class 1B NICs is temporary and will end on 5 April 2023.  These rates will then revert to current levels.

When will the Levy apply?

From 6 April 2023, the Levy will become payable by employees at a rate of 1.25% whenever a liability to employee Class 1 NICs arises. 

It should be noted that unlike Class 1 NICs, the Levy will be payable by employees who are above the state pension age (66 years) and therefore employers will need to ensure that this requirement is taken into account in the operation of the employer’s payroll from 6 April 2023.

The Levy will also be payable by employers at a rate of 1.25% whenever:

• a liability to employer Class 1 NICs, Class 1A NICs or Class 1B NICs arises; and
• an employee who is above State Pension Age is required to pay the Levy.

Will any reliefs apply to the Levy?

Yes.  All existing NICs reliefs will apply to the Levy including:

• relief for employees under the age of 21
• relief for apprentices under the age of 25
• relief for those eligible for the Employment Allowance.

How will the Levy be calculated and paid?

Earnings on which NICs are calculated (or would be calculated where the employee is above state pension age) will be used to calculate the Levy.

For employees and employers, the Levy will be collected through existing PAYE payroll.

What steps should employers take now?

Employers should ensure that their existing payroll (whether inhouse or external) will reflect the increase in NICs rates with effect from 6 April 2022.

Steps should be taken to comply with HMRC’s request that employers, where appropriate, include the following message on payslips of employees who have to pay the increased NICs between 6 April 2022 and 5 April 2023:

“1.25% uplift in NICs, funds NHS, health & social care”.

Employers may wish to consider whether any additional communication to employees would be helpful, prior to 6 April 2022, to ensure that employees are aware of both the amount, and purpose, of the NICs increase.

How should employers prepare for the introduction of the Levy?

• From 6 April 2023, employers will need to report the Levy as a new item through payroll. Therefore, employers will need to ensure that the necessary changes to their payroll systems are in place ahead of 6 April 2023.
• Employers will need to identify those employees who will be above the state pension age as at 6 April 2023 and ensure that their payroll systems provide for the deduction of the Levy from earnings paid to those employees from that date.
• Employers should consider the impact of these changes on their employment contracts and settlement agreements. Because the additional deductions from salary required for increased NICs and the Levy are automatically authorised by law, there is no requirement for employers to amend their template employment contracts to allow for these changes. However, for clarity, employers may wish to make specific reference to these deductions in any ‘authorised deductions from salary’ clauses. Employers who off-set payments due to tax authorities from other payments owed to employees (beyond the scope of salary deductions allowed by law) need specific authority to do so, in writing, and will need to include NICs and the Levy in any such authorisation. The same considerations apply to any increased NICs/Levy deductions and set-offs in relation to compensation payments to employees, or former employees, under Settlement Agreements and COT3 agreements.
• Employers should consider reviewing any share-based incentive arrangements to ensure that the Levy can be recovered from employees in respect of gains realised under those arrangements from 6 April 2023.
• From 6 April 2023, employers may wish to consider whether any agreements to transfer employer NICs to the employee in relation to share-based payments should be replicated to enable the transfer of the employer’s Levy to the employee.

Contributors: Laura Allum and Sarah Maddock

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at February 2022. Specific advice should be sought for specific cases. For more information see our terms & conditions.