Policy paper

Cancellation of the Health and Social Care Levy and in-year reductions in National Insurance contributions rates

Published 23 September 2022

Who is likely to be affected

Employers, employees and the self-employed who are liable to pay National Insurance contributions (NICs), and individuals working above the State Pension age, who were due to pay the Health and Social Care Levy from April 2023. Individuals who only pay Class 2 and Class 3 NICs will not be affected.

General description of the measure

This measure will repeal the Health and Social Care Levy Act 2021.

This has 2 consequences. First, this measure will reduce the main and additional rates of Class 1, Class 1A, Class 1B and Class 4 NICs from 6 November 2022, in effect removing the temporary 1.25 percentage point increase legislated in section 5 of the Health and Social Care Levy Act 2021 for the remainder of the 2022-23 tax year.

Secondly, the 1.25% Health and Social Care Levy will not come into force as a separate tax from 6 April 2023 as previously planned.

Individuals, including those working above State Pension age, and employers will not now be liable to pay the Levy from 6 April 2023.

Overall funding for health and social care services will remain at the same level as if the Levy was in place.

Policy objective

This measure will reduce NICs rates for employers, employees and the self-employed through an in-year change, and will stop the introduction of the Health and Social Care Levy as a separate tax from April 2023.

For individuals, building on the increase in the Primary Threshold and Lower Profits Limit at Spring Statement 2022, this measure will mean that employed and self-employed people will pay less NICs overall and keep more of what they earn.

Businesses who currently have NICs liabilities will pay less NICs, allowing them greater scope to invest in their businesses and supporting the overall growth of the economy.^{[footnote 1]}

Background to the measure

The Health and Social Care Levy was announced on 7 September 2021. It was legislated for through the Health and Social Care Levy Act 2021, which received Royal Assent on 20 October 2021.

It was implemented from 6 April 2022 through a temporary increase to Class 1, Class 1A, Class 1B and Class 4 NICs rates in 2022-23, the proceeds of which are payable towards the cost of health care in the United Kingdom. The Levy was then intended to be formally separated from NICs from 6 April 2023 and would have been payable by employers, employees and the self-employed, including those working above State Pension age, as a separate tax.  

On 22 September 2022 the government announced that it intends to reduce both the main and additional rates of Class 1, Class 1A, Class 1B and Class 4 NICs from 6 November 2022 and stop the Health and Social Care Levy from coming into force.

Detailed proposal

Operative date

With effect from 6 November, the Class 1 NICs rate reduction will have effect prospectively by reducing the main and additional rates of Class 1 employee NICs by 1.25 percentage points to 12% and 2%. Class 1 employer NICs will also be reduced by 1.25 percentage points to 13.8%. In the case of NICs rates which apply annually there will be transitional arrangements to reduce the current rates. Class 1A (not paid monthly through RTI) and 1B will be set at 14.53% for the 2022-23 tax year.

The main and additional rates of Class 4 will be set at 9.73% and 2.73% respectively^{[footnote 2]} for the 2022-23 tax year. In the case of Class 1 rates which apply annually, particularly directors, the main and additional rates will be set at 12.73% and 2.73% respectively and have effect for the tax year 2022-23 from Royal Assent of the Bill.^{[footnote 3]}

The repeal of the Health and Social Care Levy will take place immediately upon Royal Assent of the Bill.

From 6 April 2023, the NICs rates applicable in the 2021 to 2022 tax year will apply.

Current law

Current law is contained in the Health and Social Care Levy Act 2021. The Health and Social Care Levy Act 2021 provides for a temporary increase in the rates of NICs by 1.25 percentage points for the 2022-23 tax year and introduces the Health and Social Care Levy from 6 April 2023.

The Social Security Contributions and Benefits Act 1992 (and Northern Ireland equivalent) set out the various NICs that employees, employers and self-employed individuals are liable for.

Proposed revisions

Primary Legislation has been introduced to repeal the Health and Social Care Levy Act 2021.

This legislation will also reduce the rates of Class 1, 1A, 1B and 4 NICs, in effect removing the temporary 1.25 percentage point increase for the remainder of the tax year. Detail on how these rates will apply are found in the operative date section.

Summary of impacts

Exchequer impact (£ million)

Measure title	2022 to 2023	2023 to 2024	2024 to 2025	2025 to 2026	2026 to 2027
National Insurance: reverse temporary 1.25 percentage point increase in NICs rates from November 2022, and cancel the Health and Social Care Levy[footnote 4]	-6930	-16955	-17210	-17685	-18185
Memo: increased tax yield due to higher wages and profits as the result of the tax change[footnote 5]	+860	+2620	+2720	+2825	+2935
Memo: net Exchequer cost of reversing temporary 1.25 percentage point increase in NICs rates from November 2022, and cancelling the Health and Social Care Levy[footnote 6]	-6070	-14335	-14490	-14860	-15250

These figures are set out in table 4.2 of the Growth Plan 2022.

The costings have been produced using the economic forecast from Spring Statement 2022, as this is the latest available official forecast. These costings will be finalised and accounted for in the public finances at the next forecast.

Economic impact

This measure is anticipated to have significant macroeconomic impacts, increasing wages and profits and with some increase in overall hours worked.

There are also likely to be behavioural effects, including decisions around whether to incorporate or operate on a self-employed basis, and business decisions around wage bills and recruitment.

Impact on individuals, households and families

This measure will have a positive impact on individuals, households and families across the United Kingdom by providing a tax cut for around 28 million individuals earning more than the annual equivalent of £12,570 per annum (£11,908 for self-employed people in 2022-23 only, rising to £12,570 from April 2023). Cutting NICs rates from November 2022 will mean the typical taxpayer will receive an average benefit of around £135 for the 2022-23 tax year, and £330 in the 2023-24 tax year.

Some employees may not benefit immediately from the in-year reduction in NICs rates if their employer is unable to update payroll software before 6 November 2022 — these employees should receive the benefit retrospectively once updates have been applied. Although individuals should contact their employer for refunds as a first port of call in all circumstances, there may be circumstances where individuals may need to apply to HMRC for a refund (for example, if their employer is no longer trading, or if an individual has moved roles and their previous employer has confirmed they are unable to issue a refund retrospectively themselves).

Working individuals above State Pension age do not pay NICs. The Health and Social Care Levy Act 2021 applied that the new Levy will be charged on the same income as NICs, including those individuals working above State Pension age. The repeal of the Health and Social Care Levy Act 2021 now means individuals working above State Pension age will no longer be affected as previously anticipated from 6 April 2023.

There is expected to be no impact on family formation, stability or breakdown.

Equalities impacts

It is anticipated that this measure will have a positive effect on individuals regardless of protected characteristics in so far as they are affected by changes to NICs. This measure is likely to benefit male taxpayers more than female taxpayers, as they tend to earn more on average.

From April 2023, individuals, including those working above State Pension age, and employers will benefit from the repeal of the Levy as they will no longer be required to pay it.

Impact on business including civil society organisations

The in-year reduction to NICs rates will mean that 950,000 businesses will see a reduction in their 2022-23 tax year NICs liabilities.

Cancellation of the Levy will mean that 920,000^{[footnote 7]} businesses will be better off, as they will no longer be required to pay the Levy (based on full year impact in 2023 to 2024), of which 20,000 will be taken out of paying employer NICs entirely due to the reversal.^{[footnote 8]} The average savings for businesses will be £9,600 for the 2023 to 2024 tax year.

This measure is expected to have an effect on approximately 1.6 million employers who are liable to pay NICs. One-off costs will include familiarisation with the change. Depending on the type of payroll software employers use, impacts may include updating software or systems to reflect the change and updating returns and employee payroll records, the cost of which may be passed onto customers. Where some employers are unable to update their payroll software before 6 November 2022, they will be required to run their payroll retrospectively for past periods where higher NICs rates had been incorrectly applied. There are not expected to be any continuing costs.

Customer experience is expected to remain broadly the same as this measure does not significantly alter how the majority of employers interact with HMRC. This measure is not expected to effect civil society organisations.

Operational impact (£ million) (HMRC or other)

The cancellation of the Levy from 6 April 2023, and the reduction of the 1.25 percentage point increase in NICs for employers, employees and the self-employed will require changes to HMRC’s IT systems. There will also be extra staff costs supporting customers and ensuring they have paid the correct NICs. Those costs are currently being quantified.

Other impacts

No other impacts have been identified.

Monitoring and evaluation

This measure will be kept under review and monitored through communication with affected taxpayer groups and information collected from NICs receipts.

Further advice

If you have any questions about this change, contact the NICs Policy Team at: [email protected].

Declaration

Richard Fuller MP, Economic Secretary to the Treasury, has read this tax information and impact note and is satisfied that, given the available evidence, it represents a reasonable view of the likely costs, benefits and impacts of the measure.

1. Businesses that benefit are all businesses with Class 1 NICs liabilities of greater than £5,000. Eligible businesses (claiming the Employment Allowance) with Class 1 NICs liabilities of less than £5,000 already pay no Class 1 NICs. ↩

2. Class 1A, 1B and Class 4 NICs are assessed on an annual basis, therefore an average rate has been applied to ensure consistency and fairness with Class 1 NICs payers who have paid the increased NICs rate since April 2022. ↩

3. Class 1 NICs paid by directors are assessed on an annual basis, therefore an average rate has been applied to ensure consistency and fairness with in-year changes to other rates of NICs. ↩

4. Gross cost reflects total direct tax no longer raised from the Health and Social Care Levy. ↩

5. Using the Office for Budget Responsibility’s Autumn 2021 Economic and Fiscal Outlook assumption of the impact of the tax increase on wages and profits, scaled for 2022-23 to match the period the measure would have been in place. ↩

6. Net cost reflects total cost after accounting for the reduction in cost due to the increases to wages as a result of the policy and the positive impact of this on tax receipts. ↩

7. This is based on the expected annual uprating to the NICs Secondary Threshold from April 2023. ↩

8. This is due to the Employment Allowance. ↩