July sees the introduction of the first stage of a new health and social care levy, an additional tax designed to support the NHS and additional associated services and allow them to increase spending. The levy will affect both individuals and organisations that contribute towards national insurance.
This means payroll departments will need to action change as soon as possible to ensure compliance with the new levy. Here’s how the levy will affect your payroll department, and what you can do.
What is the health and social care levy and why does it exist?
The levy has been raised to help the NHS access additional money to spend on treatment, improved infrastructure and to manage the backlog of patients that would otherwise have to be paid for with borrowing. The government has decided that it is more sustainable to add an additional 1.25% rate of tax that will be added to existing national insurance calculations, rather than seek financing from other sources.
This means employers, employees and self-employed people will contribute an extra 1.25% on top of national insurance payments each month.
Initially, the levy will only apply temporarily to class 1 and class 4 national insurance contributions, but this will be replaced by an overall levy from April 2023, covering all contributors.
Boris Johnson has ‘ringfenced’ the future proceeds of this levy, meaning funds will only go towards the NHS and social care.
What is the knock on effect for employers?
A 1.25% increase in National Insurance Contributions (NICs) is due on April 6 for employers who pay Class 1, Class 1A, or Class 1B contributions. A separate levy is due on April 6, 2023, which will affect contributions on payments to those over the state pension age and those other than Class 1 and Class 4 contributors.
Unquestionably, there will be a cost to both payroll departments and your business. There will be an additional 1.25% contribution of monthly salary for each employee, as well as the associated costs with changing the way national insurance contributions are calculated.
Although businesses have been given six months to prepare for the levy, many organisations are yet to finalise processes. Wholesale changes may be needed to automated payroll systems, and there are expected fines in place for organisations that fail to comply, or process incorrect national insurance deduction calculations.
The other factor that is making the levy a challenge is that national insurance deductions will return to normal in the 2023/2024 tax year, and be replaced by the comprehensive health and social care levy that will be applied to all NI contributions.
What can I do to make life easier?
The first thing to do is make sure your employees are aware that their national insurance contributions will increase again. This is critically important as the cost of living squeeze increases, but may also save time when it comes to payslip queries from those who are unaware of the increase.
You’ll also need to educate your payroll teams to ensure they are fully aware of the changes and know what to do to comply with the levy. A solution here may be to ensure the correct messaging or internal communications campaign to let teams know changes are coming, and that they have the correct levels of support.
You’ll then need to think about reconfiguring your payroll software and processes. Depending on the size of your organisation and the complexity of your payroll, this could be a costly, so planning in advance with IT, project management or change teams, or your payroll system provider may be needed.
One option is to connect with an account manager at Topsource Worldwide, who can arrange to review your current payroll setup and ensure it is compliant ahead of the levy. We provide extensive payroll management solutions both in the UK and overseas, with expert knowledge of the upcoming levy.
Partnering with a payroll outsourcing company like Topsource Worldwide can take the pressure off your existing payroll team and help to spread some of the responsibility of adhering to the levy, as well as giving you access to additional support.
The big takeaway
Ultimately, making sure everyone in your business is aware of the upcoming levy and having a robust approach to it in place will save you from unexpected costs – and potential fines.
Although the levy is completely designed for funding of health and social care, there is no guarantee that there won’t be additional levies like this one, or if the levy will increase or decrease in the future. This is why it makes sense to set in place a more agile process for making ad-hoc changes to payroll systems – something an outsourcing partner has built-in as standard.
Connect with Topsource Worldwide today if you have any concerns about the health and social care levy’s effect on your payroll.