Health and Social Care Levy – what it means

To address the funding crisis in the NHS and social care, the government has announced a new 1.25% Health and Social Care Levy. From April 2022, this will initially be implemented as a temporary increase in National Insurance contribution rates.

From April 2023, the levy will become a separate tax, and National Insurance rates will return to their previous levels. Crucially, the levy will also apply to individuals working above the State Pension age, who are currently exempt from National Insurance. Employers will also see their contributions rise, increasing the overall cost of employment.

Impact on employees and employers

For employees, the 1.25% increase means a reduction in take-home pay. For employers, the matching 1.25% increase in secondary Class 1 NICs represents a direct increase to their payroll costs. This dual impact makes hiring and retaining staff more expensive, and businesses will need to factor this into their budgeting and pricing strategies.

Impact on the self-employed and dividends

The self-employed will also face a 1.25% increase in Class 4 NICs on their profits. Furthermore, to ensure that those who extract income via dividends also contribute to the levy, the rates of dividend tax will increase by 1.25% across all bands. This reduces the tax advantage of operating through a limited company and taking a low salary/high dividend remuneration package.

The longer-term picture

While the levy is ring-fenced for health and social care, it represents a significant overall increase in the tax burden. When combined with the freezing of personal tax allowances and the upcoming increase in Corporation Tax, businesses and individuals face a challenging fiscal environment. Reviewing remuneration strategies and utilising tax-efficient benefits (like salary sacrifice for pensions) will be key to mitigating the impact.