In April of this year, a new National Insurance rise will become operational, and it will take the shape of the first stage of the proposed Health and Social Care Levy (the levy). The government has ignored all of the pleas to repeal the National Insurance rise, including a symbolic resolution that was approved by the House of Commons on March 9, 2022. However, the motion did not have any legal weight.
There has been a lot of attention paid to the fact that the implementation of the tax would have a huge impact on employees; nevertheless, it will also have significant ramifications for companies.
The question now is, what exactly are the modifications that are going to be implemented, and what actions can companies take to lessen the effect of the new tax that is going to be imposed?
The two-stage process
The tax will be implemented in two stages in order to provide HMRC with sufficient time to modernise its systems. There will be a one-time increase of 1.25 percentage points in National Insurance Contributions (NIC) beginning on April 6, 2022. This increase will affect both workers and employers, as well as people who are self-employed. In addition to that, the rates that apply to income from dividends will go up by 1.25 percentage points.
The new rate for companies, Class 1/1A and 1B National Insurance Contribution, will be 15.05 percent. Businesses have been contacted by HMRC with the suggestion that they put a notice on payslips that reads as follows: “1.25 percent increase in NICs, finances NHS, health and social care.” HMRC has made this suggestion. This action has drawn criticism, with some firms stating that it is not the responsibility of their human resources departments to advocate for or support a tax increase by the government.
The National Insurance Contribution (NIC) rates are scheduled to return to what they were in March 2021 if a separate tax known as the levy is not implemented beginning with the 2023–2024 tax year. This new levy will be shown in a distinct manner on pay stubs, and it will be applicable to both the employer and the employee at a rate of 1.25 percentage points for each, resulting in a total levy rate of 2.5 percentage points.
However, even when the levy is collected as a separate fee, charges will still be applied to benefits that result in employer national insurance contribution responsibility. Although it is important to notice a major distinction between the new levy and the normal NIC, the most important distinction is that employees who have reached the age of retirement will be subject to the new levy and will be required to pay it.
The plain financial impact
The Office for Budget Responsibility estimates that the levy will generate an annual revenue of £12.4 billion over the next three years. This revenue will be used to pay for increased funding for health and social care, with the ultimate goal of reducing the strain placed on the National Health Service (NHS).
As a direct result of the revisions, it is reasonable to anticipate that the monthly NIC expenses of the typical employer will increase by around 10 percent. According to an independent study conducted by the Federation of Small Businesses (FSB), the additional cost to employers is estimated to be £3,000 per year. This, in conjunction with increases in the National Minimum and Living Wage, reductions in government support, and the removal of a lower rate of VAT in the hospitality sector, will add a considerable cost. This is especially important to keep in mind when considering the fact that businesses are currently facing high levels of inflation and price increases in a variety of different areas. The Federation of Small Businesses has requested that the government investigate the possibility of providing assistance to mitigate the costs of the levy. This assistance could take the form of increasing the employment allowance to £5,000 or modifying the criteria for business rates exemptions so that up to 200,000 small businesses do not have to pay them.
Since National Insurance Contributions (NIC) are not a devolved tax, it is expected that they would be levied across the whole United Kingdom. The IR35 legislation will also be impacted by the revisions, as the charge will now be factored into the calculations for presumed employment tax and national insurance contributions for workers who are employed by fee payers.
Reducing impact: what steps can be taken?
Before the modifications take effect on April 6, businesses have the chance to take rapid action and reduce the negative impact of the expected increases in taxes, with a variety of choices at their disposal to do this. First and foremost, companies have to think about the possibilities of handing out any kind of discretionary incentive to workers prior to April 6, 2022.
In addition, a measure that would be beneficial for employers to do would be to make more use of the salary sacrifice agreements that are already in place in their respective organisations. If a company does not already have agreements of this kind in place, it is a good idea for them to look into this. This includes programmes that encourage workers to ride bicycles to work and any automobile programmes for electric or ultra-low emission vehicles that employees can use. It also covers pension contributions for employees who participate in defined contributions pension programmes.
The establishment of these schemes, in the event that they do not already exist, would bring about major benefits for companies, as a result of the fact that the wages of employees, who are subject to the tax, would be decreased. Aside from the tax advantages, programmes of this sort may also pay dividends as tools for employee retention and recruitment. This is something that employers should keep in mind, particularly in light of the present talent shortages that exist across a variety of industries.
It is also important for companies to conduct assessments of any share incentive programmes that are currently in place in their organisations. It is possible that certain elective choices may need to be modified or altered in order to incorporate the impending levy for 2023/24. This is due to the fact that workers are obligated to pay the employers’ Class 1 NIC responsibilities in certain of these schemes. Furthermore, it would be a smart move for employees to explore using share schemes rather than bonuses or salary raises because share schemes come with larger tax advantages. This would be a wiser move for employees.
Employees may be sent on secondment by their companies, maybe from the United Kingdom to nations with which the United Kingdom does not have an established official social security agreement. In situations like this, the NIC position of the employees should be evaluated. If there is a secondee who has arrived from a country with which the United Kingdom does not have a reciprocated social security agreement, one option may be to employ the secondee locally before they are seconded. This would reduce the amount of UK NIC liabilities that are incurred during the first 52 weeks of the secondee’s time in the United Kingdom.
It is impossible to overestimate the significance of evaluating previously implemented policies, as doing so can lead to significant tax savings. For instance, the cost of private medical treatment might be analysed to determine where savings can be made. An additional approach that should be taken into consideration is the utilisation of tax-exempt advantages. Examples of such benefits include, but are not limited to, the provision of yearly medical checkups and the introduction of discounts on services and commodities. If it is feasible to declare dividends and pay them before to April 6, 2022, then firms ought to think about doing so if they have the ability to do so.
Every company has to also consider carrying out an exhaustive examination of their budgets and projections; after this task has been accomplished, the areas in which cost reductions may be implemented will become more readily obvious.
The imposition of the Health and Social Care Levy, which is scheduled to take effect the following month, is anticipated to result in considerable additional expenses for businesses located throughout the United Kingdom. Employers have options available to them that will make the implementation of the tax far more workable and less of a burden on their businesses. Despite this, the time to take action is now since the clock is ticking until the modifications go into effect.