New Health and Social Care Levy’s impact on National Insurance contributions

The new Health and Social Care Levy due to take effect on 6 April 2022, will initially be used to support the NHS and in due course general health and social care in the UK.

As a result, there will be a temporary rise in the rates of National Insurance contributions (NIC) payable on all earnings above £823pm (£190pw). An increase of 1.25 percentage points will be applied to Class 1, 1A, 1B (and Class 4 for self-employed) NICs. It’s important to note that from 6 April 2023, the NIC rates will revert to the pre-2022 rates of 12% and 2% for employees and 13.8% for employers, and a new Health and Social Care Levy of 1.25% will be introduced as an additional deduction from gross pay to be shown separately on payslips. Meaning employees who don’t pay Class 1 NIC may still pay the levy from April 2023, for example workers who are at state pension age.

The rise in NICs is not actually a 1.25% increase, but a 1.25 decimal point increase, meaning the actual percentage impact is far greater to both employees and employers alike.

Employees will see their NIC rate rise from 12% to 13.25% on the band of income between £823 and £4,189 per month (which is effectively a 10.4% increase) and from 2% to 3.25% on any income above £4,189 per month (a 62.5% increase). With personal allowance, student loan and tax band thresholds not moving at all for many within the UK (particularly for England, Wales and Northern Ireland), this will be an additional blow to the pockets of many individuals as we move into the 2022/23 tax year.

For employers, employer NIC will rise from 13.8% to 15.05% (a 9% increase). At a time when businesses are still fighting to recover from the effects of the pandemic, alongside rising inflation and the withdrawal of COVID support packages, it’s clear it will unfortunately be another tough year for many.

One way in which employers could help reduce this burden is to introduce a salary sacrifice pension scheme for their employees. This is where an employee agrees to exchange their pay by an amount equal to their pension contributions, and in exchange, the employer then agrees to pay the total pension contributions. So, any contributions paid will be treated as employer only.

When paying pension contributions in this manner, both the employees and employers National Insurance contributions, and the Health and Social Care Levy are calculated based on salary after the sacrifice has been deducted, thus reducing the impact of the increase.

This is something which needs careful consideration and planning by the employer, however it can prove to be a cost saving tool for both the employee and employer.

If you’d like to discuss this in more detail, please get in touch with your usual Larking Gowen contact. You can find contact details in the Our People section of our website. Alternatively, call 0330 024 0888 or email enquiry@larking-gowen.co.uk.

Please note, we’re unable to provide pensions investment advice as this is regulated financial advice, however we are happy to explain the cost impact of such arrangements.

Emma Arthurton