Preparing for the Health and Social Care Levy – tax efficient benefit provision

15 October 2021

The recently announced Health and Social Care Levy will apply from 6 April 2022 to employees and employers liable for Class 1 National Insurance contributions (NICs) and, for employers only, those liable to Class 1A NICs on taxable benefits and Class 1B NICs on PAYE settlement agreements (PSAs).

For the 2022/23 tax year only, the levy amount will be collected by way of a temporary increase of 1.25 per cent in both the employee and employer rates of NICs. From 6 April 2023, and once HMRC systems have been updated, a separately identifiable Health and Social Care Levy of 1.25 per cent, for both employees and employers, will replace the temporarily increased NICs rates which apply for 2022/23. 

Prior to the introduction of the levy, employers have the opportunity to consider how they can potentially mitigate the financial cost. One way of achieving this would be for them to make use of tax and NICs efficient benefits in kind and/or to undertake a critical assessment of what items are included in their PSAs, to identify whether PSA liabilities can be reduced. 

Tax and NICs efficient benefits in kind

As noted above, the new levy will apply to taxable benefits in kind liable to Class 1A or Class 1B NICs. Employers should therefore review whether their current benefit and reward packages include tax and NICs efficient offerings such as electric and/or low CO2 emission company cars and employee medical and health assessments. The provision of discounted ‘in house’ goods and services and/or the use of other staff discount platforms could also be considered to enhance employees’ financial wellbeing, perhaps instead of a future salary rise. Consideration should also be given to the use of HMRC approved share based incentives, for example as an alternative to traditional cash bonus arrangements.

The use of HMRC accepted salary sacrifice arrangements such as salary sacrifice for employer pension contributions should also be revisited. Salary sacrifice for pension arrangements results in NICs savings for both the employer and participating employees and encourages pension saving. For employers that do not already offer salary sacrifice for pension arrangements, the NICs savings that can be achieved would offset both the impact of the levy and the increases in employer pension auto enrolment minimum contributions over recent years. Where pension salary sacrifice arrangements are already in place, the introduction of the levy is an ideal time to refresh communications and potentially attract wider participation.

Review of PAYE settlement agreement coverage

PSAs are widely used by many employers to maintain compliance around taxable employee expenses and benefits where it is not considered appropriate to include amounts on an employee’s annual form P11D or to tax the benefit via the payroll if this applies. By entering into a PSA, an employer can settle the grossed-up income tax and NICs due on certain expenses and benefits by way of an annual submission and payment to HMRC.

The new levy will, however, increase the Class 1B employer only NICs payable on items included in a PSA to 15.05 per cent for the 2022/23 tax year. Employers should therefore consider whether expenditure that is routinely included in a PSA is still necessary. At the same time, employers should revisit whether items that are included in their annual PSA computation could in fact be covered by the trivial benefit exemption which would remove any income tax and NICs charge.

For more information, please get in touch with David Williams-Richardson, or your usual RSM contact.