In April, a new tax rise is being introduced, in the form of the first stage of the planned Health and Social Care Levy. The government has resisted calls to abolish this hike.
This rise will have a large impact on many employees and substantial consequences for employers.
So, what changes are about to take place and how can businesses reduce the impact?
To ensure HMRC have enough time to update their systems, the new tax rise will come into action in two stages. From April 6th 2022, there will be a temporary 1.25% rise on National Insurance for employees and employers and self-employed workers. Furthermore, there will also be a hike of 1.25% for dividend income tax rates.
For employers, Class 1/1A and 1B NIC rates will rise, reaching 15.05 per cent.
From the 2023/2024 tax year, a separate tax, called the levy, will come into play. This new levy will be separate on payslips and will apply to employers and employees at a rate of 1.25% each, resulting in a combined levy of 2.5%.
Despite this, benefits that attract employer NIC liability will continue to be subject to charges even when the levy is a standalone charge. Although one key difference from regular NIC will be that employees over pension age will have to pay the new levy.
The levy is set to raise over £12bn each year for the next three years and this money will go towards funding for health and social care, which should relieve the burden on the NHS.
The average employer will likely see their monthly NIC bills increase by 10 per cent, due to these changes. The Federation of Small Businesses has estimated that this will cost employers an additional £3,000 each year.
So, what steps can be taken to reduce the impact?
Before the changes come into action on April 6th, businesses can move quickly and mitigate the impact of the tax hike. First of all, employers could look into paying employees any discretionary bonuses before April 6th 2022.
Additionally, it may be sensible for employers to increase the use of salary sacrifice arrangements. If there are no arrangements like this, then it may be worth reviewing this. This could include cycle to work schemes and electric car schemes that employees can use, as well as pension contributions for employees participating in defined contributions schemes.
It would also be good to review any share incentive schemes in place. Employees need to pay the employers’ Class 1 NIC liabilities in some schemes, so some elective options may need to be amended to include the upcoming levy for 2023/2024. Furthermore, it may be a great idea for employees to switch out bonuses or pay rises and use share schemes instead, as there are greater tax advantages.
Some employers may have employees on secondments, perhaps in countries where the UK doesn’t have formal social security agreements. In these situations, the employees’ NIC case needs to be reviewed. If there is a secondee that has arrived from countries with whom the UK does not have a social security agreement, it may be an option to employ the secondee locally before they are seconded, which would reduce UK NIC liabilities during the first 52 weeks of the UK secondment.
This is a great time to review existing policies, as this is where tax savings can be found. For example, it may be worth reviewing private medical care. Another thing to consider would be the use of tax-exempt benefits, such as annual medical check-ups and introducing services and goods discounts. If it is possible to declare dividends, and pay them, before 6 April 2022, then businesses should also try to do so.
All businesses should review their budgets and forecasts, as this will highlight where savings can be made.
The introduction of the Health and Social Care Levy next month is likely to add significant costs onto all employers across the UK. There are steps that employers can take to ensure that the introduction of the levy is made much more manageable. However, employers need to take action as soon as possible.
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