National Insurance Contributions: Preparing for the Social Care Levy
The recently announced hike in National Insurance Contributions (NIC) follows long-running debate around the escalating cost of social care in an increasingly ageing population. The government has published a policy paper setting out its plans for reforming the health and social care sector and funding.
A key development is the 1.25% increase in NIC which will take effect from April 2022 for one year and will apply to both employers and employees (Class 1), and the self-employed (Class 4).
Then from April 2023, the 1.25% increase will be collected separately from NIC by way of a tax on earned income as a ‘health and social care levy’, subject to existing NIC reliefs and the Employment Allowance. Pensioners will also be required to pay the levy. This ‘extra’ cash will be ring-fenced and invested into health and social care.
What does this mean for businesses?
National Insurance is a form of employment tax paid by employers under PAYE or directly to HM Customs & Excise by the self-employed. It is reportedly estimated that the announced increase will cost employers some £6.5 billion.
The increase will have a direct financial hit on businesses and the self-employed; and breaks a manifesto commitment not to raise income tax, national insurance of VAT.
Small businesses - Once the increase in NIC kicks in, the financial burden on businesses will intensify and the additional cost will need to be included in anticipated expenditure from next April. Small to medium sized firms, some of which are already struggling financially in the wake of lockdowns and restrictions, may be particularly hard hit. That said, government estimates 40% of businesses will be unaffected by the levy.
One option is to review the relationship between the business and employees and consider, for example, converting an employment relationship to an agency relationship. An agent then becomes self-employed and personally responsible for paying their own NIC contributions.
Arrangements that offer income tax and NIC relief, such as employee share plans or salary sacrifice schemes, may also be worth considering to mitigate the additional costs.
Self-employed – The increase in NIC means less cash available to pay the self-employed by way of salary and dividends. The self-employed (particularly those who are incorporated) have been particularly hard hit by the pandemic. Directors owning limited companies who paid themselves mainly dividends were notoriously excluded from government covid business support schemes but will soon be exposed to the increase in NIC.
To add to their financial burden, corporation tax is due to rise to 25% from April 2023.
For sole traders and the self-employed who are incorporated, note that the 1.25% increase will also apply to all dividend tax bands, (subject to the existing dividend allowance).
Preparation is key. Sole traders and other businesses who will be adversely affected need to factor in the expected financial hit and plan accordingly. On the administrative side, businesses need to ensure their accounting software will be able to take into account the changes to avoid costly errors.
We strongly advise you take specialist advice from tax professionals.
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