The new Health and Social Care Levy – what it means for employers and employees

Wednesday, September 29th, 2021

Here at Wolverhampton accountants Copia Wealth & Tax, we aim to keep our clients informed of up-and-coming changes to tax and accounting that could impact them and/or their business. 

Today we focus on the recent announcement regarding the Health and Social Care Levy along with various other insights that you should be aware of, including Making Tax Digital (“MTD”) for Income Tax delay and potential HMRC support for childcare costs.

The Health and Social Care Levy (“care levy”) – 1.25% increase to NICs and dividend tax

The Government has announced the introduction of a new 1.25% care levy to provide an extra £12 billion a year to support the NHS and social care.

From April 2022, a 1.25% rise in National Insurance Contributions (NICs) to be paid by both employers and employees is proposed. From 2023/4 this will then become a separate levy on earned income calculated in the same way as NIC and appearing separately on an employee’s payslip. This 1.25% increase also applies to the Class 4 contributions paid by the self-employed on their profits. 

This means that Class 1 NICs paid by employees increase to 13.25% of earnings above £9,568 and the self-employed rate increases to 10.25%. A 3% differential between employed and self-employed remains in place but it is rumoured that the rates may be aligned in the future. For earnings or profits above £50,270, the rate will be 3.25%.

From 6 April 2022, for employers the Class 1 NIC rate increases from 13.8% to 15.05%. For smaller businesses, they may be able to set off the £4,000 employment allowance against their employers’ NIC liability and so avoid being impacted financially. 

Individuals operating through personal service companies who are subject to the “off-payroll” working rules will also be caught by these measures.

In addition, there is a proposed 1.25% increase in the rate of tax payable on dividends received by those who own shares in companies. In short, after the £2,000 tax-free dividend allowance, the rate of tax for taxpayers will be 8.75% at the basic rate, 33.75% for the higher rate and, at 39.35% for income greater than £150,000 pa. This will impact those family company directors/shareholders who remunerate themselves by taking a low salary and larger dividends to minimise NICs.

With the proposals being announced well in advance of implementation there is scope for forward planning to reduce the impact of these measures. For example, employees could consider agreeing to a salary sacrifice arrangement with their employer, for example sacrificing their £5,000 annual bonus for an additional pension contribution paid by their employer which would save 1.25% NICs for both employee and employer as well as £2,000 income tax where the employee is a higher rate taxpayer. 

Employees could also consider a salary sacrifice in favour of an electric company car. Shareholders of family companies could investigate bringing forward dividend payments to before 6 April 2022 if the additional dividend does not take the taxpayer’s income above £50,270, as the excess, would be taxable at the 32.5% rate instead of the 7.5% rate creating a worse tax position.

Postponement of MTD for Income Tax

Having thankfully listened to feedback from businesses and the accounting profession, the Government has announced that they will introduce Making Tax Digital (MTD) for Income Tax Self-Assessment (ITSA) a year later i.e., in the tax year beginning April 2024, whilst the start date for partnerships to join MTD for ITSA will be introduced from the tax year beginning April 2025.

This means that the self-employed and buy to let property owners have an extra year to prepare for the digitalisation of Income Tax and allows HMRC more time to evaluate the new system.

The £10,000 per annum gross income threshold above which self-employed traders and buy to let landlords will be mandated to comply with MTD for income tax from April 2024 has not been uplifted, despite lobbying on the issue.

HMRC support for childcare costs

If you have employees requiring childcare provision, then if they have not already done so they should set up a “Tax-Free” Childcare Account to help pay towards the cost of childminders, breakfast and after school clubs, nursery fees, and approved play schemes.

For every £8 an eligible family pays into the childcare account the government will top it up by £2, up to £2,000 a year, or up to £4,000 a year if a child is disabled. The scheme is available to parents or carers who have children aged up to 11 years old, or up to seventeen if their child is disabled. There are conditions around eligibility, including income levels. Further information is available at https://www.gov.uk/tax-free-childcare 

Reminder – Coronavirus Job Retention Scheme ends in September

Just a quick reminder that the CJRS (or furlough) scheme ends at the end of September. The grant claims for employees furloughed during September are restricted to 60% of the employee’s usual pay up to a maximum cap of £1,875, with the employer required to bring furlough pay up to a minimum of 80%.

Final claims for September must be submitted by 14 October with adjustments made no later than 28 October 2021.

Our friendly team is here to help

We believe that forward planning can result in significant savings for you and your business.

So, whilst for many employers and employees the proposed care levy will be costly, to understand what your business may be able to do in mitigation, call our professional team here at Copia Wealth & Tax Ltd, Wolverhampton on 01902 783172 to book a confidential appointment with one of our experts or alternatively, just click HERE to contact us via the form on our website and one of our team will be in touch

We look forward to hearing from you.