NIC health hike: Further complications emergeby
Issues are emerging concerning the NIC increases due to apply from 6 April 2022 and the Health and Social Care levy due to replace that tax rise from 6 April 2023.
The provisions to increase the NIC rates (classes: 1, 1A, 1B and 4) are included in the Health and Social Care Levy Bill 2021, which has already passed its House of Commons stages in Parliament, so is likely to become law very shortly.
Expanding the base
The Health and Social Care Levy Bill makes it clear that the increase in NIC will only apply for one tax year: 2022/23, as from 6 April 2023 the Health and Social Care (HSC) Levy will replace the top 1.25% of NIC in all cases.
However, the state pension age restriction for primary class 1 and class 4 NIC will not apply to the HSC levy (clause 3(3)). This means that new tax will be payable by pensioners who are still working as employees or are self-employed after 5 April 2023, if they earn over the primary threshold of £9,568 per year.
There are three categories of employee where the employer can currently pay a zero rate of secondary class 1 NIC on the employee’s pay up to the secondary threshold (£50,270 pa). Those categories are:
- Anyone aged under 21
- Apprentices aged under 25
- Ex-forces personnel in their first civilian role for up to 12 months
In addition, from 6 April 2022 a zero rate of secondary class 1 NIC will be available on employees’ wages who work for least 60% of their time at Freeport tax site. This zero-rate will apply up to a new secondary threshold which is expected to be set at £25,000 per year.
The HSC levy won’t be payable by the employer on employees’ wages where the zero rate of secondary class 1 NIC applies (clause 1(5)).
HMRC has stated that the employment allowance can be set against the increased secondary class 1 NIC for 2022/23, but what is not clear is whether the employment allowance will be available to set against the HSC levy from April 2023.
The Employment Allowance is not mentioned in the Health and Social Care Levy Bill 2021, but relief may be provided by regulations made under clause 4(2) after the Act is passed.
The Scottish Parliament has the power to set its own rates and thresholds for income tax, so since 2017 the Scottish tax bands do not tie up with the thresholds for NIC in the rest of the UK. This is because powers to set the NIC thresholds have not been devolved to the Scottish Parliament.
The result for 2022/23 will be some very high marginal tax rates (see table) for Scottish taxpayers on earnings and profits. The Scottish income tax rates do not apply to income from savings, dividends, or to set the level of capital gains tax payable.
Example: Employee in Scotland in 2022/23
|Income in band (including personal allowance) £||Scottish tax%||NIC%||Total rate on band %|
|0 – 9,568||0||0||0|
|9,568 – 12,570||0||13.25||13.25|
|12,571 – 14,667||19||13.25||22.25|
|14,668 – 25,296||20||13.25||33.25|
|25,297 – 43,662||21||13.25||34.25|
|43,663 - 50,270||41||13.25||54.25|
|50,271 – 100,000||41||3.25||44.25|
|100,001 – 125,140||61.5||3.25||64.75|
|125,140 to 150,000||41||3.25||44.25|
This table assumes that Scottish income tax rates and thresholds will remain at their present levels in 2022/23.
The 54.25% marginal rate between £43,663 and £50,270, is due to the Scottish higher tax rate of 41% starting at a lower level than the reduced NIC rate, which is aligned with the 40% band in the rest of the UK. Taxpayers in England, Wales and Northern Ireland will pay a marginal tax rate of 33.25% on earned income in this band.
The 64.75% marginal rate between £100,001 and £125,140 arises because the personal allowance is withdrawn by £1 for every £2 of additional income in that band.
Alexander Garden, chair of the CIOT’s Scottish Technical Committee, noted that most employees will pay an extra £37.53 per year more than they would have if the government had decided to fund the social and health care package through income tax.
In 2022/23 Universal Credit claimants should have their benefit topped up to compensate for some of the loss of income resulting from the NIC increase in 2022/23. This is because entitlement to Universal Credit is worked out after income tax and NIC deductions are taken into account.
However, it is not clear whether the new HSC Levy will be treated in the same way as NIC for Universal Credit purposes. UC claimants need to know whether they will continue to get this protection once NIC rates revert back to the 2021/22 levels.