The UK's New Health Levy – The Details
In September 2021, the UK Government announced increases in National Insurance contributions (NICs) and a new tax to help fund the country’s health and social care systems. A description of the measures and the taxpayers they affect are provided here.
National Insurance in the UK
National Insurance in the UK is broadly equivalent to social security taxes in other countries. NICs are paid by employees, employers and the self-employed.
For 2021/22, employees pay NICs at a rate of zero percent on the first GBP9,568 of annual income, rising to 12 percent on the portion of income up to GBP50,270 and 2 percent on income in excess of this amount.
Employers pay NICs in respect of an employee’s wages at a rate of 13.8 percent on annual income between GBP8,840 and GBP50,270.
The self-employed pay NICs at a rate of 9 percent on profits between GBP9,569 and GBP50,270 and at 2 percent on income in excess of GBP50,270.
The New Measures
The new tax will be implemented in two stages. The first stage provides for a temporary 1.25 percent increase in NICs for employees, employers and the self-employed.
NIC rates will revert to 2021/22 rates in 2023. However, a new 1.25 percent Health and Social Care Levy will then be introduced, revenues from which will be ringfenced to fund health and social care provision. This tax will be payable on earnings or profits on which an employee, employer or self-employed individual is already liable to pay NICs. The new levy will also be subject to the same rules as NICs in respect of reliefs, thresholds and other requirements.
While the changes will require an amendment to the Social Security Contributions and Benefits Act 1992 (and the Northern Ireland equivalent), the Government has said that the new levy will operate in the same way as the existing NIC system for administrative purposes.
This measure affects all taxpayers liable to pay NICs, including employers, employees and the self-employed. However, individual taxpayers who only pay Class 2 and 3 NICs will not be affected by the change. These are voluntary contributions made by self-employed people not liable to pay NICs (because their income is below the NIC threshold) and individuals not subject to NICs but who want to avoid gaps in their contributions record.
Individuals above state pension age will be unaffected by the temporary increase to NICs for the 2022 to 2023 tax year but will be liable to pay the levy from April 2023.
The temporary increase in NICs will take effect from April 6, 2022, with the new Health and Social Care levy commencing on April 6, 2023.
According to the Government, in the 2022 to 2023 tax year, an individual earning the median 20-percent basic-rate taxpayer’s income of GBP24,100 would be expected to pay an additional GBP180 in tax. This rises to an extra GBP715 for an individual earning the median 40 percent higher rate taxpayer’s income of GBP67,100.
With regards to businesses, the Government estimates that over 1.6 million UK employers will be required to introduce the measures. One-off costs may include software or system changes and the updating of employee records to reflect the changes.