Benefits in kind: Liabilities increase from 6 April 2022

Employment costs will increase from 6 April 2022 with the introduction of the Health and Social Care Levy (the levy), including in relation to providing non-cash benefits liable to Class 1A and Class 1B National Insurance Contributions. Employers who review their benefit offerings now stand the best chance of limiting the impact of these rising costs. 

This article considers the impact of the levy on the cost of providing benefits liable to Class 1A and Class 1B NIC. Further information about how the levy affects employment costs is available here.

What’s changing?

The levy is to be introduced in two stages:

1. From 2022/23, there will be a temporary increase of 1.25 per cent in NIC rates. This will apply for Class 1 (both employer’s and employee’s) NIC, Class 1A NIC, Class 1B NIC, and Class 4 NIC.
2. From 2023/24, a formal and separate 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 then return to their previous level.

When the government first announced the levy back in September, it was not clear whether it would apply to Class 1A or Class 1B NIC liabilities on benefits. It is now confirmed that:

• Class 1A and 1B NIC will rise in line with Class 1 NIC for 2022/23; and
• benefits in kind will be subject to the levy from 2023/24.

What should I be aware of?

Currently, employer’s NIC due on benefits in kind is paid following the end of the relevant tax year:

• Class 1A NIC is payable by 19/22 July following the tax year. Class 1A NIC is due on taxable benefits reported on forms P11D, or subject to tax under a formal payrolling arrangement with HMRC and following the submission of a form P11D(b) to HMRC.
• Class 1B NIC is payable by 19/22 October following the tax year. Class 1B NIC is due on taxable benefits (such as staff entertainment) dealt with via a PAYE Settlement Agreement (PSA).

For the 2022/23 tax year, the rates of Class 1A and Class 1B NIC will increase from 13.8 per cent to 15.05 per cent.

From the 2023/24 tax year, the rates of Class 1A and Class 1B NIC will revert back to 13.8 per cent, but the levy will also separately apply to taxable benefits in addition to the Class 1A or Class 1B NIC.

Example 1

In the 2022/23 tax year, an employer provides its UK employees with private medical insurance cover at a cost of £75,000.

The Class 1A NIC payable by 19/22 July 2023 is £11,287.50 (ie £75,000 x 15.05 per cent). Note that, if the Class 1A NIC rate had remained at 13.8 per cent, the Class 1A NIC liability would have been £10,350.

In the 2023/24 tax year, the cost of the insurance cover rises to £78,750. The Class 1A NIC payable is £10,867.50 (ie £78,750 x 13.8 per cent) and the additional levy payable on the benefit is £984.38.

Example 2

The same employer operates a PSA to cover taxable staff entertainment and non-cash staff gifts.

For 2022/23 the total value of benefits included in the PSA calculation is £62,500. All employees are 40 per cent taxpayers:

• the grossed-up income tax due under the PSA for 2022/23 is £41,666.67; and
• the Class 1B NIC payable is £15,677.08 (ie £62,500 + £41,666.67 x 15.05 per cent).

The total PSA liability due is therefore £57,343.75 – but note that, if the Class 1B NIC rate had remained at 13.8 per cent, the total PSA liability would have been £56,041.67.

For 2023/24 the value of the benefits included in the PSA increases slightly, to £65,000, and the employees remain 40 per cent taxpayers:

• the grossed-up income tax due under the PSA for 2023/24 is £43,333.33;
• the Class 1B NIC payable is £14,949.99 (ie £65,000 + £43,333.33 x 13.8 per cent); and
• the levy also payable is £1,354.17 (ie £65,000 + £43,333.33 x 1.25 per cent)*.

The total PSA liability due is therefore £59,637.49*.

*Please note this calculation is to illustrate how we expect the changes will apply in practice in relation to PSAs from 2023/24, however, HMRC has not yet confirmed.

How will the levy be collected on benefits?

For the 2022/23 tax year it will be collected through a direct increase in the rates of Class 1A and Class 1B NIC.

At this stage we are waiting for HMRC guidance as to how the levy will be charged and collected on benefits from 2023/24, so watch this space for further information.

Can we mitigate the impact of these costs?

Employers should use the introduction of the levy as a catalyst for reviewing benefit offerings. Areas to consider might include:   

• the underlying cost of benefits to establish whether savings can be made (eg changing an existing private medical insurance provider);
• using ‘HMRC approved’ salary sacrifice arrangements, such as those for pension contributions;
• using employee benefits with a low value for tax and NIC purposes (such as electric company cars), perhaps in conjunction with salary sacrifice for wider employee participation;
• making wider use of benefits exempt from NIC (eg annual medical check-ups); and
• employee discounts on goods and services to enhance their financial wellbeing (eg discounts on an employer’s own goods or services, or via a staff discount platform).

Employers should also take the opportunity to review the benefits included in their PSAs to ensure that exemptions are being fully used, and benefits that could be exempt from tax and NIC are not being needlessly subjected to the levy. This might include:

• making full use of the exemption for annual staff entertainment;
• considering whether certain benefits included in the PSA could be exempt as trivial benefits; and
• establishing whether the cost of providing free or subsidised on-site food and refreshments could be exempt.

Employers should also ensure that the additional cost of providing benefits which attract the levy are factored in when setting budgets (eg when organising staff entertainment events or making taxable gifts to employees). 

For further guidance, please contact Lee Knight, Susan Ball, or your usual RSM contact.