On 8th September 2021, the Prime Minister unveiled a major reform package intended to address long standing challenges in health and social care provision across the UK. This initiative includes a detailed funding strategy to ensure the sustainability of social care services, particularly as demand continues to grow with an aging population. Central to this strategy was the introduction of a new tax, the Health and Social Care Levy, scheduled to begin in April 2023. As a transitional measure, the Government will temporarily apply National Insurance increases for the 2022/23 tax year.
Temporary National Insurance Increases: 2022/23
For the 2022/23 tax year, National Insurance will increase by 1.25 percentage points across several categories: Primary and Secondary Class 1, Class 1A, Class 1B and Class 4. The aim of this temporary rise is to generate immediate funding for the NHS and related institutions across the UK. From 6th April 2023, these contribution rates should revert to their 2021/22 levels, with the permanent implementation of the Health and Social Care Levy taking over the additional charge.
What This Means in Real Terms
Although 1.25% may sound minor, it will have a tangible impact. Someone earning £30,000 annually will pay approximately £255 more in National Insurance over the year, representing a 10% increase in their National Insurance liability. A person earning £50,000 will see an additional annual cost of about £505. Lower earners will especially feel the affects, as a greater portion of their income is subject to the increase.
This change comes amidst soaring inflation, with the Consumer Prices Index (CPI) rising to 5.5% in January 2022, the highest in nearly 30 years. Despite widespread calls to delay the rise, the Government has confirmed its intention to proceed.
Changes By National Insurance Class
Employee Class 1 Contributions
Employees will pay National Insurance on earnings between £184 and £967 per week. The standard rate will increase from 12% to 13.25% for 2022/23. Earnings above £967 will be taxed at an additional rate, rising from 2% to 3.25%. National Insurance Contributions are not required from employees once they reach State Pension age.
Employer Class 1 Contributions
Employers will pay National Insurance on earnings above £170 per week at a rate increasing from 13.8% to 15.05% in 2022/23. These contributions will continue regardless of the employee’s age.
Certain reliefs apply: no Employer National Insurance Contributions will be due on earnings below £967 per week for employees under 21, apprentices under 25 or armed forces veterans in their first civilian role. Employers in Freeport tax sites will also benefit from a £25,000 upper threshold before National Insurance Contributions apply to new hires.
Employer Only Class 1A and 1B Contributions
- Class 1A applies to most taxable Benefits-In-Kind, such as company cars and private medical insurance.
- Class 1B covers PAYE Settlement Agreements, allowing employers to cover taxes on minor or irregular benefits.
Both rates will rise from 13.8% to 15.05% for 2022/23.
Self-Employed Class 2 and 4 Contributions
- Class 2, which is a flat weekly amount, will remain unchanged.
- Class 4 will increase:
- From 9% to 10.25% on profits between £9,568 and £50,270.
- From 2% to 3.25% on profits over £50,270.
Voluntary Class 3
Class 3, which is used to fill gaps in National Insurance records for State Pension eligibility, will not be affected by the temporary increases.
The Health and Social Care Levy (From April 2023)
The Health and Social Care Levy is due to be introduced as a new, permanent 1.25% tax starting in April 2023. It will apply to the same earnings and profits currently covered by Class 1, 1A, 1B and Class 4 National Insurance Contributions. Crucially, it will also apply to individuals above State Pension age, unlike traditional National Insurance Contributions.
The levy will be ring-fenced to directly support health and social care services. Its administration is expected to mirror the existing National Insurance structure, consequently simplifying compliance and collection.
How to Mitigate the Impact
With increased payroll costs on the horizon, individuals and businesses should explore legal ways to reduce their National Insurance and tax liabilities.
Salary Sacrifice Schemes
Salary Sacrifice arrangements enable employees to exchange part of their salary for non-cash benefits. This can therefore reduce National Insurance and Income Tax liability. Eligible benefits include:
- Employer pension contributions
- Electric vehicle leases
- Cycle-to-Work programs
- Additional paid leave
Case Study: Electric Vehicle Lease
A Higher Rate taxpayer earning £60,000 may choose to lease a Tesla Model 3 through Salary Sacrifice arrangement. While standard lease might cost £524 per month, the net cost could fall to £267 due to tax and National Insurance savings. The car’s Benefit-In-Kind rate is just 2% for 2022/23, compared to up to 25% for some petrol vehicles.
Options for Company Directors and Business Owners
Business owners not on salary may consider business contract hire, which allows the full lease cost to be deducted from profits. VAT can also be reclaimed: 50% for mixed use or 100% for business-only use. Other strategies also include:
- Taking dividends instead of salary
- Increasing employer pension contributions
- Adjusting employee compensation structures
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