The New Health and Social Care Levy

The new, UK wide, Health and Social Care Levy was announced by the Government in September 2021 and is headlined to tackle NHS Covid backlogs, cut waiting times and reform social care.

What are the implications for churches and charities?

The new levy will apply from April 2022 and will mean a 1.25% charge for:

• Employees (and from April 2023, this will include those over state pension age who continue to work)
• Employers
• The self-employed through an increase in Class 4 contributions

There will also be an 1.25% increase in dividend tax rates (but that won’t apply to shares held in ISAs).

Will it stay at 1.25%?

Initially the increase will be bolted onto the National Insurance system. But from April 2023, it will be legislatively separate and national insurance rates will return to their former levels. Cynically, this could mean that incremental increases may follow over time, as we have seen with Insurance Premium Tax and Air Passenger Duty.

Exceptions

The Levy will not apply to:

• Employees for earnings up to the ‘Primary Threshold’
• Employers in respect of each of their employee’s earnings up to the ‘Secondary Threshold’

In 2021/22, the Primary Threshold is £9,568 and the Secondary Threshold is £8,840. These are reviewed annually and may therefore be slightly higher by the time that the Levy comes into force.

Nor will it apply to:

• Apprentices under the age of 25
• Anyone under the age of 21
• Veterans

Provided their gross earnings do not exceed £50,270.

 

Financial impact on employers and employees

The following series of examples illustrate the impact of the HSCL on small employers such as churches and Christian charities. The impact on larger employers will, in most cases, be significantly more severe.

Example 1

An employee earning the National Living Wage rate for a 35-hour week equates to an annual salary of £17,290 p.a. How much Health and Social Care Levy (HSCL) will be payable?

Employee cost of HSCL

Earnings above primary threshold of £9,568 = £7,722

HSCL = £7,722 @ 1.25% = £97 (rounded to nearest £)

Employer cost

Earnings above secondary threshold of £8,840 = £8,450

HSCL = £8,450 @ 1.25% = £106 (rounded to nearest £)

Total cost = £202 p.a.

The cost to the employer is subject to any remaining Employment Allowance that is available to the employer. This is covered further below.

Example 2

If the employer employs three people each earning the National Living Wage, as in example 1, then subject to availability of Employment Allowance, the costs become:

Employee cost of HSCL

£97 (as above) for each employee = £290

Employer cost

£106 (as above) for each employee = £317

Total cost = £606 p.a.

Example 3

A single employee earns an annual salary of £25,000.

Employee cost of HSCL

Earnings above primary threshold of £9,568 = £15,432

HSCL = £15,432 @ 1.25% = £193 (rounded to nearest £)

Employer cost

Earnings above secondary threshold of £8,840 = £16,160

HSCL = £16,160 @ 1.25% = £202

Total cost = £395 p.a. subject to any remaining Employment Allowance that is available to the employer.

Example 4

If the employer employs three people each earning £25,000, as in example 3, then subject to availability of Employment Allowance, the costs become:

Employee cost of HSCL

£193 (as above) for each employee = £579

Employer cost

£202 (as above) for each employee = £606

Total cost = £1,185 p.a.

Example 5

A single employee is earning £48,000 p.a.

Employee cost of HSCL

Earnings above primary threshold of £9,568 = £38,432

HSCL = £38,432 @ 1.25% = £480

Employer cost

Earnings above secondary threshold of £8,840 = £39,160

HSCL = £39,160 @ 1.25% = £490

Total cost = £970 p.a. subject to Employment Allowance.

 

Employment Allowance

Employment Allowance provides a rebate of up to a total of £4,000 for employers’ Class 1 national insurance contributions in the year.

The Government has confirmed that the new Health and Social Care Levy will also be eligible for Employment Allowance. But because of the £4,000 annual cap means that this will only be of benefit to the smallest of employers who employ only one or a few employees on relatively low salaries.

Let’s see how this all works in the above examples:

Example 1

Single employee, on minimum wage, earning £17,290 pa.

Employers’ National Insurance

Earnings above secondary threshold = £8,450 @ 13.8% (employer NI rate) = £1,166

Add: Health and Social Care Levy = £8,450 @ 1.25% = £106

Total cost = £1,272

As total annual cost including the HSCL is less than £4,000, all £1,272 including the new Levy is recoverable as Employment Allowance.

Example 2

Three employees, each earning the minimum wage of £17,290 pa.

Employers’ National Insurance

Earnings above secondary threshold = £25,350 @ 13.8% (employer NI rate) = £3,498

Add: Health and Social Care Levy = £25,350 @ 1.25% = £317

Total cost = £3,815

The total annual cost of secondary national insurance contributions plus the total cost of the Levy is still less than £4,000 (just). All of the new Levy is therefore recoverable as Employment Allowance.

Example 3

Single employee earning £25,000 pa.

Employers’ National Insurance

Earnings above secondary threshold = £16,160 @ 13.8% (employer NI rate) = £2,230

Add: Health and Social Care Levy = £16,160 @ 1.25% = £202

Total cost = £2,432

As total annual cost (single employee payroll) is less than £4,000, all £2,432 including the new Levy is recoverable as Employment Allowance.

Example 4

Three employees, each earning £25,000 pa.

Employers’ National Insurance

Earnings above secondary threshold = £48,480 @ 13.8% (employer NI rate) = £6,690

Add: Health and Social Care Levy = £48,480 @ 1.25% = £606

Total cost = £7,296

As total annual cost of secondary national insurance contributions are already above £4,000 before the cost of the HSCL is taken into account, none of the £606 additional cost is recoverable.

Example 5

Single employee earning £48,000 pa.

Employers’ National Insurance

Earnings above secondary threshold = £39,160 @ 13.8% (employer NI rate) = £5,404

Add: Health and Social Care Levy = £39,160 @ 1.25% = £490

Total cost = £5,894

As total annual cost of secondary national insurance contributions are already above £4,000 before the cost of the HSCL is taken into account, none of the £490 additional cost is recoverable.

Summarising…

Employees and earnings	HSCL – employee(s)	HSCL - Employer	Employment Allowance	Employer – net cost
1 at £17,290 [1]	£96.52	£105.63	£(105.63)	Nil
3 at £17,290	£289.56	£316.89	£(316.89)	Nil
1 at £25,000	£192.90	£202.00	£(202.00)	Nil
3 at £25,000	£578.70	£606.00	nil	£606.00
1 at £48,000	£480.40	£489.50	nil	£489.50

[1] That is the National Living Wage rate from April 2022 for a 23+ year old working a 35-hour week. Calculations based on 2020/21 Primary and Secondary National Insurance Thresholds.

So, when will the Levy bite? …Some ‘break’ points

Based on current National Insurance rates, the £4,000 Employment Allowance is fully utilised when the employer has:

• a single employee earning £37,860
• two employees each earning £23,333
• three employees each earning £18,502

In each of the above cases, the employer will suffer the full cost of the new Levy.

Conclusions

• Employment Allowance is of very limited assistance in protecting against the costs of the Levy
• Employers with even the smallest of payrolls are likely to see some additional cost from the Levy.
• Depending on the number of employees and their pay levels, the additional costs to both employer and employee could be quite significant.
• Employees may seek or need a pay increase to restore their take home pay. If that is the case, be aware that the increase in pay will need to also take account of increased PAYE, NI and pension contributions and so will be significantly higher than the cost to them of the Levy alone.

Action points

• Charities will need to ascertain what these costs are likely to be in their own case.
• With strong inflationary forces in the economy and charities’ income already under pressure, it is important that additional and new costs are evaluated and built into forecasts and budgets. Pressures may be exacerbated by increasing interest rates and pay settlements.
• Don’t overlook missionaries or other self-employed Christian workers that your church may be supporting in the UK. Their vocational income is subject to tax and national insurance and where their income is more than £9,568 pa. they will also have to pay the Levy but without recourse to Employment Allowance. You may therefore wish to consider topping up their support.

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