Update on 19 October 2022: On 23 September 2022, the then Chancellor announced the reversal of the increase to National Insurance Contributions (NIC) rates, which will also include abolishing the planned Health and Social Care Levy.
The Health and Social Care Levy was introduced on 6 April 2022 as part of the measures to add £12bn a year to the Treasury's revenue.
The impact of this new tax would have largely been felt by workers. Our experts have looked at ways employers can try to minimise the impact of this new levy in addition to the cost of living crisis.
- HSC Levy Hybrid Working
- HSC Levy Cycle to work scheme
- HSC Levy affect PAYE
- HSC Levy impact business
HSC Levy Hybrid Working
Since the pandemic, the prevalence of hybrid working has skyrocketed. The majority of employees are now demanding more flexible working, despite the government’s recent push to bring workers back to the office.
For most employees, working from home was a necessity during the pandemic, but in the past few months, hybrid working has overtaken homeworking and according to the Office for National Statistics (ONS), 84 percent of workers have stated they wanted to continue splitting their working time between home and the office.
During the 2020/21 and 2021/22 tax years, hybrid working provided cost saving opportunities to employees; for employees who were required to work from home as a result of the pandemic, HMRC temporarily introduced tax and NIC relief to cover the cost of homeworking equipment.
Unfortunately, the Covid exemption ceased at the start of the 2022/23 tax year, and all of these expenses are now taxable and liable to UK National Insurance Contributions (NICs). Employers can choose to gross up the costs when processing these through payroll to ensure employees do not suffer the tax consequences, however this will be costly decision for the employer, particularly due to the additional Health and Social Care Levy charges imposed from 6 April 2022 onwards.
Thankfully, there are some homeworking expenses that will not attract tax and NIC. These are as follows:
- Equipment, services, and supplies – provided they’re only used for business purposes or private use is ‘insignificant’ e.g., laptops, tablets, and computers.
- One Mobile and SIM cards per employee (unrestricted private use)
- Broadband – provided the following conditions are met:
- a broadband connection was not already available
- the employee needs it to work from home
- it is mainly used for business purposes
In addition to the above, there is also a home working allowance, available to all employees who are working from home provided there is an agreement in place with their employer and they regularly work from home under those arrangements.
Under the home working allowance, employers can cover the costs of additional household expenses such as heating or electricity, on a tax-free basis for employees working from home up to maximum limit of a £6 weekly or £26 monthly, provided this amount does not exceed the cost of their actual household expenses.
If employers reimburse household expenses to employees in excess of the home working allowance, the excess should be added to employee’s other earnings subjected to tax & NIC deductions.
Due to the facilities and technology employers can make available to employees on the premises as part of the office environment, employees should be incentivised to return to the office. Where possible, employers may want to consider enhancing facilities and providing incentives to ensure an upgraded work environment is available in the office, and employees are encouraged to return to work.
However, due to the improved work/life balance that hybrid working brings and the decreased commuting costs, employers should also be taking hybrid working into consideration as a way to attract and retain employees.
HSC Levy Cycle to work scheme
Cycle to work scheme
Since its introduction over 20 years ago, the Cycle to work scheme has helped cut congestion on the roads, free up space on public transport, make a positive impact on the environment, and improve the health of the nation.
The number of people participating in the Cycle to Work scheme in recent years has surged massively. According to the Cycling to Work Alliance, there was a 120 per cent increase in the number of people joining the scheme, from June 2019 to June 2020.
The above figure could increase further during 2022, since as of 6 April, both employees and employers are required to pay additional Health and Social Care Levy charges above the already imposed national insurance charge on employee salaries. Due to the rising cost of living, employers may be more inclined to consider providing employees with benefits that reduce tax or NIC, such as the cycle to work scheme, as a cost saving alternative to employee pay rises, effectively stretching employee net pay.
Through the scheme, employees will give up part of their salary in exchange for a bicycle and equipment from their employer, free from any tax charges. Due to the deduction from their salaries, the employee pays less tax and National Insurance Contributions (NICs) and the employer is able to save on employer NICs at 13.8%, Apprenticeship Levy at 0.5%, and additional Health and Social Care Levy charges at 1.25% (where applicable) on the amount sacrificed.
Alternatively, as part of the Cycle to work scheme, employers can also loan employees up to £10,000 tax free to purchase the bike. Where there is a loan to an employee within the tax-exempt amount, there will be no benefit in kind or reporting obligations. Some employees may favour this option, as employers aren’t required to check that they are using the cycle for 50 percent of their ordinary commuting as is normally the requirement. However, due to the tax incentives of participating in the salary sacrifice scheme, many employees may choose this option over taking out a loan where possible.
To qualify for the scheme and receive the tax benefits, the following qualifying conditions must be:
- An employee must not, at any point during the hire period, own the cycle;
- At least 50% of the cycle’s use must be for ‘qualifying journeys’, i.e., to or from work or in the course of work;
- The offer of the use of hired bicycles must be made available across the whole workforce, with no groups of employees being excluded. This does not necessarily have to be through a salary sacrifice arrangement in each case.
Due to the 50% qualifying journey condition, an employee is not able to hire more than two cycles as these would both need to be used for the commute.
The Cycle to work scheme must be offered to all employees, however all employees must be paid the National Minimum or National Living Wage and employees must not sacrifice salary to a level below this minimum.
Employers should also be aware that the salary sacrifice arrangement may have a minor effect on employees' current or future entitlement to a range of benefits e.g., entitlement to holiday pay and bonuses. More information on this topic can be found here.
Previously, there was an £1,000 limit on the amount an employee could spend on cycle equipment, however in 2019 the government announced updated Cycle to Work Scheme guidance removing the price cap. The abolishment of £1,000 limit will unfortunately mean increased scrutiny from HMRC as the value they can look to achieve through non-compliance has increased significantly. Employers therefore may still want to set their own maximum limit on the amount employees can spend on cycle equipment through salary sacrifice.
As a low effort, high impact incentive that financially benefits both employers and employees it is no wonder the number of employee’s joining the Cycle to Work scheme is increasing. Due to the increased cost of living, we may see even more employers introducing schemes to save money and keep employees fit, all in the course of their commute!
HSC Levy affect PAYE
How the new health and social care levy will affect PAYE for employers
On 7 September 2021, the government announced the introduction from April 2022 of the Health and Social Care Levy (the levy). It will apply to employees and employers liable for Class 1 NICs (including Class1A and 1B), as well as to the self-employed and those in receipt of dividends.
For the 2022-23 tax year, given the time it takes to prepare HMRC systems, the levy will be collected through an increase in both employee and employer NICs rates by 1.25 per cent. This means a total increase of 2.5 per cent in respect of employed workers (split between the employer and employee). HMRC has suggested that a generic message about the levy could be included on payslips for 2022/3.
Once HMRC systems have been updated, from April 2023 a formal and separately identifiable Health and Social Care levy of 1.25 per cent for both the employer and employees will replace the increase in NICs rates. The underlying NICs rates will return to their previous level. Importantly, from April 2023 the levy will also be payable on earnings of employees who are above State Pension age.
From April 2023, receipts from the levy will go to those responsible for health and social care in the devolved administrations, including NHS Scotland, NHS Wales and Health and Social Care (HSC) in Northern Ireland. The levy will appear as a separately identifiable entry on payslips.
Employers will pay the levy in relation to employees earning above the secondary threshold (currently £8,840 in 2021-22), although existing reliefs will apply for:
- employers of apprentices under the age of 25;
- all employees under the age of 21;
- ex-armed forces veterans; and
- new employees in Freeports from April 2022.
For small businesses, the £4,000 annual employment allowance for NICs can be used against the new levy as well as NIC liabilities. Individuals operating through personal service companies will have to pay the levy on any salary they pay themselves and, if they take their income in the form of dividends from the company, the tax rate on those dividends will also rise by 1.25 per cent from April 2022.
Impact on employers
To understand and assess the immediate impact, we would recommend that employers consider:
- Advising employees of the change and considering if a note on payslips from April 2022 is appropriate.
- The extra employment costs and the impact it will have on cashflow and profitability for 2022/23 and later years.
- The impact on their off-payroll labour/IR35 obligations and costs where the off-payroll workers are deemed to be inside IR35.
Thinking more broadly
Faced with potentially increased employment costs, the corresponding reduction in employees’ net pay and the likelihood of remote or hybrid working remaining the ‘norm’ for a large number of staff, employers should use this significant change as a catalyst for a review of their current reward offering. Areas to consider might include:
- payment of the tax and NIC free home-working allowance;
- tax-free provision of relevant equipment and services to enable employees to work from home;
- ‘HMRC approved’ salary sacrifice arrangements, such as those for pension contributions which reduce NICs for both employers and employees;
- using employee benefits with a low taxable/NIC-able value, such as electric company cars, perhaps in conjunction with salary sacrifice for wider employee participation;
- implementing tax advantaged/approved share option schemes instead of ‘traditional’ cash bonuses;
- making wider use of benefits exempt from NICs (eg annual medical check-ups) and reviewing the cost of existing benefits liable to NICs to identify cost savings (eg changing an existing private medical insurance provider could reduce costs); and
- facilitating discounts on goods and services for employees to enhance their financial wellbeing (this might be discounts on an employer’s own goods or services or via a staff discount platform).
Employers have until 5 April 2022 to prepare for these increased costs. Those who start the process now will have the best chance of limiting their impact.
HSC Levy impact business
The impact on business owners
As well as the headline-grabbing 2.5 per cent increase on the cost of earnings for employees, the new Health and Social Levy also affects the self-employed and those who operate their businesses via companies.
The Treasury estimates that over a third of the overall tax increases from the new levy, including over half the increase in dividend tax rates, will come from the top 10 per cent of households. It’s therefore important for business owners in this bracket to understand the impact of the new rules.
For the self-employed, those who are liable to pay Class 4 National Insurance Contributions (NICs) will also be liable to an additional 1.25 per cent cost. In 2022/23 this will be collected as an additional NICs cost, and the new levy will replace that from April 2023. People older than the state pension age will not be subject to the increased NICs cost in 2022/23, but will be subject to the levy from 2023 onwards.
In addition, those who receive dividends will also incur an additional 1.25 per cent cost from 6 April 2022. The government estimates that more than 60 per cent of those who receive dividends do not incur any tax because the income falls within the £2,000 dividend allowance (ie dividends received up to this level are free from income tax). Of the estimated £12bn that these proposals should generate, around £0.6bn will come from this increase in dividend taxes.
Those who traditionally withdraw the profits from their business by way of dividends are likely to be among those most affected by the new measures. This levy is the latest in a series of measures that have slowly eroded the difference between withdrawing profits from a business, by way of salary or bonus, and by declaring a dividend.
The Chancellor is clearly keen to limit any avoidance of the new levy by means of simply paying dividends. One unintended consequence, however, may be that the levy increases the difference in tax paid by those who are self-employed when compared to tax paid on salary and dividend income.
For example, a self-employed additional rate taxpayer will have an effective tax rate of 48.25 per cent, compared to someone who pays themselves a dividend from their company at an effective tax rate of 50.87 per cent (which may rise to over 55 per cent with the increase in corporation tax from April 2023).
New taxes always come with unintended consequences so it remains to be seen whether the more favourable tax treatment afforded to the self-employed stands the test of time. As ever, it’s important to take advice on how best to structure your business and any profit extraction.
For help and advice on this or any other personal tax issue please contact Chris Etherington.