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Health and Social Care Levy – the wider impact on businesses and what happens next

On 7 September 2021 the Prime Minister, Boris Johnson, announced the introduction of a new Health and Social Care Levy. The anticipated £36 billion that will be raised from the scheme over the next three years will be “going directly to health and social care across the whole of our United Kingdom”, said the Prime Minister.

From April 2022 the levy will initially be collected by a 1.25% increase in National Insurance rates, paid by both employers and workers, including Class 1, Class 1A, Class 1B and Class 4, as well as a 1.25% increase to the Dividend Tax Rates. From April 2023 National Insurance will return to its current rate and the extra tax will be collected as a new Health and Social Care Levy which will still be paid by both employers and workers.

Since the announcement, much has been made in the press regarding the impact that this change will have on the pockets of individuals, and rightly so given that this has already been identified by the Government, who have stated, “There may be an impact on family formation, stability or breakdown as individuals, who are currently just about managing financially, will see their disposable income reduce.”

However, a significant element of the levy will be borne by businesses as a result of the increase in Class 1 Employers National Insurance, and business owners should prepare for this.

We have illustrated below how the levy will reduce the amount of income in individuals’ pockets and how much more it will cost employers to employ an individual per salary:

 

So, with this increase in cost of employment for all businesses, what could it mean for businesses in the future? Many industries across the UK have had significant struggles throughout the pandemic, with many experiencing forced closures due to the lockdown rules. As these businesses start to reopen and recover, they will need to factor in this additional expenditure to ensure their business stays buoyant and that they can compete for the right calibre of workers.

Some industries, such as those in tech and e-tail, have been incredibly successful during the pandemic and it could be argued that it would be fairer to see them pay a larger proportion of the levy than businesses in sectors that were hit hard financially, such as hospitality or travel.

It is also important to consider the wider economic recovery that is required after the Covid-19 pandemic. An element of this recovery rightly has to revolve around repairing social care and the NHS, but this recovery will also rely upon businesses investing in their future and individuals spending their excess disposable income. The levy both affects the ability of businesses to invest in their recovery and/or growth and reduces the disposable income of all workers. It will also potentially impact on wider salary growth and job creation, so there are concerns that it could suppress economic growth.

There are opportunities for businesses to lessen the impact of the levy, such as bringing forward planned dividends to the current tax year or offering employees salary sacrifice or share option schemes.

Protecting the NHS and ensuring social care is available to everyone that needs it is incredibly important, but the ‘one size fits all’ nature of the levy being introduced at such a critical stage of the UK’s economic recovery could have a much greater impact on struggling and recovering businesses than was anticipated.

The levy will not be introduced until April 2022 which means the next six months provide a valuable opportunity for businesses to plan ahead so they are in a strong position to meet these increased costs.

For help and advice on how to prepare for the health and social care levy or any other tax issue, please contact Phil Hartley below:

Written 6 October 2021.

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