As if there weren’t enough challenges for businesses post-pandemic, the UK government recently announced a new health and social care (HSC) levy, which will see a 1.25% increase in employee and employer National Insurance contributions (NICs).
This additional tax will be payable on any earnings or profits on which an employee, employer or self-employed individual is already liable to pay a qualifying NIC. A 1.25% surcharge on dividends will also see rates for business owners and investors increase.
So, what does this mean for your business?
To start with, the HSC levy will be collected from National Insurance contributions — presumably to make implementation and admin run a bit smoother. But from April 2023, the social tax levy will become its own tax with a separate line on payslips.
In terms of admin, the changes shouldn’t be too taxing (pardon the pun). As part of UK payroll, NICs are automatically deducted from workers’ pay packets via the pay-as-you-earn (PAYE) tax code and sent straight to HM Revenues and Customs (HMRC). Most payroll software will calculate how much tax and NI to deduct from your employees’ pay.
However, the real stickler is the cost implications, with estimates suggesting a typical small business with 50 employees could pay an extra £10,000 to £20,000 annually.
Hidden costs and cutbacks
Although 1.25% might feel like a grin-and-bear-it figure, there’s more to it than meets the eye. For one, the National Living Wage (NLW) was recently upped by about 9%. So, you’re not just looking at an increase of 1.25% — you’re looking at a potential increase of 1.25% plus 9%.
The job market is also hot right now and screaming for talent, with UK employers struggling amid the worst labour shortage since 1997. This means you’ll have to offer highly competitive salaries if you want to secure and retain the top talent. Since employer NICs are calculated based on how much the employee gets paid, the overall increase could be a lot more than 1.25% and make the process of hiring staff more expensive.
All of this needs to be factored into your bottom line and may mean reducing spending in other areas, such as employee benefits, to make savings elsewhere. But cutting back on employee benefits isn’t exactly a great way to entice top talent when recruitment is already a challenge.
How have businesses reacted to the social tax levy?
The latest UK tax development follows Rishi Sunak’s budget in March, whereby the chancellor announced the first corporation tax rise in 47 years — increasing from 19% to 25% — which will also take effect from 2023. These tax hikes mean the UK will have some of the highest dividend and corporate tax rates in Europe (based on current figures).
As such, many business groups have had an overwhelmingly negative response to the HSC levy, describing it as a tax on jobs and a blow to economic recovery.
The higher tax charges arguably place an extra financial burden on the thousands of small businesses that have suffered over the last 18 months due to COVID restrictions and lockdowns. And rather than ignite the entrepreneurial spirit needed to drive economic recovery, some say the rise in tax (particularly the corporation tax hike) will send a worrying signal to foreign investors who had their sights set on the UK.
After the large-scale redundancies at the height of the pandemic and stoppage of the furlough scheme, these tax hikes could stifle recruitment and investment — not protect jobs.
But it’s not all as bad as the headlines might suggest…
Is the UK still a good place to do business?
UK tax revenue has long been below the average for both the G7 and the OECD. And although this is set to increase under the government’s new plans, it’s worth noting that other countries are also likely to raise taxes following the pandemic — meaning the UK could still end up sitting below the average level.
Plus, while the amount the UK raises through income taxes and VAT is in line with international norms, it has some of the lowest social security contributions — even with the 1.25% increase!
As for the 1.25% hike on dividends, bear in mind that only residents pay UK tax on their dividend income, so the increase won’t impact foreign investors. The UK also has double taxation agreements with many destinations worldwide (including the US, France and India), which is ideal for international businesses that want to avoid paying tax twice on the same income.
On top of this, the UK offers a number of competitive tax incentives to encourage innovation, such as for research and development or enterprise investment. As a result, the UK has a thriving start-up scene.
Despite all the combined challenges from the pandemic and Brexit, the UK remains the sixth-largest economy after the US, China, Japan, Germany and India. And key industries such as finance, technology, manufacturing and healthcare have continued to grow under these circumstances.
Coming out on top
It’s important to remember that these tax changes won’t take full effect until 2023, when the UK economy is expected to return to pre-pandemic size.
So, while tax increases might sound like an economic blow to businesses at the moment — especially given that we’re not out of the woods just yet — it’s not all doom and gloom.
Yes, there will be some challenges ahead and some important decisions to be made (as there always are in business). But the UK has consistently been ranked as the most business-friendly of Europe’s major economies. And we see no reason why that should change.
If you’re struggling to factor these tax changes into your business finances, payroll or recruitment, TopSource Worldwide can advise on a plan of action and offer cost-effective solutions. Contact us today to see how we can help through our global employer of record and payroll services — as well as payroll in the UK and India.