The government announced plans for a new ‘health and social care levy’ in September 2021 to fund increases in associated spending in England, alongside reforms to the provision and funding of social care. This follows Boris Johnson’s pledge, made upon becoming prime minister in July 2019, to “fix the crisis in social care once and for all”. 34 Johnson B, ‘Boris Johnson's first speech as Prime Minister’, speech in Downing Street, 24 July 2019, www.gov.uk/government/speeches/boris-johnsons-first-speech-as-prime-minister-24-july-2019
What is the health and social care levy?
The levy will be a 1.25% tax on earnings for employees, the self-employed and employers. It will tax earnings in the same way as National Insurance contributions (NICs), except that it will also apply to the earnings of those over state pension age.* It will come into force in the tax year starting in April 2023.
Before the levy is introduced all three rates of NICs will increase by 1.25 percentage points, in April 2022. This has the same effect as the levy, except that it will not apply to earnings over state pension age. NICs rates will then return to their current levels in April 2023, when the levy comes into effect, as set out in the table.
The combination of employee NICs and employer NICs means that the tax charged on earnings of employees will rise by twice as much as the increase in tax on the earnings of self-employed people.
National Insurance contributions and health and social care levy rates
|Employee (main/higher rate)||Employer||Self-employed (main/higher rate)|
|Current NICs rates (2021/22)||12% / 2%||13.8%||9% / 2%|
|Temporary NICs rates (2022/23)||13.25% / 3.25%||15.05%||10.25% / 3.25%|
|NICs rates from 2023/24||NICs||12% / 2%||13.8%||9% / 2%|
|NICs rates from 2023/24||Levy||1.25%||1.25%||1.25%|
Source: HM Government, Building Back Better: Our Plan for Health and Social Care, CP 506, The Stationery Office, 2021.
* In the NICs system, only employer NICs is levied on earnings over the state pension age.
Why are National Insurance contributions being temporarily increased for one year?
For administrative reasons, HMRC cannot introduce an entirely new tax (with a new tax base) in time for April 2022. This is why the levy will be preceded by temporary NICs rises. 35 HM Revenue and Customs, ‘Health and Social Care Levy’ HM Revenue and Customs Policy Paper, (9 September 2021) retrieved 10 September 2021, www.gov.uk/government/publications/health-and-social-care-levy/health-and-social-care-levy
Will the thresholds for paying National Insurance contributions change?
When the increase in NICs was originally announced, the primary threshold for paying employee NICs was £9,880 per year and the lower profits limit for self-employed NICs was £9,568. This was significantly below the personal allowance for income tax, which is currently £12,570 per year.
The chancellor announced at the spring statement in March that the employee NICs threshold and the lower profits limit for self-employed NICs will be increased in July to equal the income tax personal allowance.
What about taxes on other sources of income, such as dividends, pensions and property?
In addition to the new levy, there will also be a 1.25 percentage point increase in taxes on dividend income from April 2022. The government argues that business owners and investors (who receive their income in the form of dividends, rather than earnings) should make a “contribution in line with that made by employees and the self-employed on their earnings”. 36 HM Revenue and Customs, ‘Health and Social Care Levy’ HM Revenue and Customs Policy Paper, (9 September 2021) retrieved 10 September 2021, www.gov.uk/government/publications/health-and-social-care-levy/health-and-social-care-levy
However, other forms of income, such as those from pensions and property, will not be affected by the new levy, as they would have been if instead income tax rates had been increased. The Institute for Fiscal Studies estimates that only 2% of the revenue generated by the levy will come from pensioner households, while two thirds will come from families aged under 50. 37 Institute for Fiscal Studies ‘An initial response to the Prime Minister’s announcement on health, social care and National Insurance’, press release, 7 September 2021 retrieved 13 September 2021, https://ifs.org.uk/publications/15597 An equivalent income tax rise would have spread the burden more evenly across different age groups: 14% from pensioner households and 54% from families aged under 50. 38 Institute for Fiscal Studies ‘An initial response to the Prime Minister’s announcement on health, social care and National Insurance’, press release, 7 September 2021 retrieved 13 September 2021, https://ifs.org.uk/publications/15597
Changing the income tax rate on non-dividend, non-savings income across the UK would have require agreement with the Scottish government, since it now controls those rates in Scotland.
How much will the new taxes raise?
The government initially estimated that the new measures would fund an increase in health and social care spending of £12 billion per year: £11.4bn from the levy and £0.6bn from the dividend tax rate increase. 39 HM Government, ‘Building Back Better: Our Plan for Health and Social Care, CP 506, The Stationery Office, 2021.
However, a combination of the changes to the NICs thresholds outlined above and recent strong nominal pay growth slightly changes the picture. The latest forecast from the Office for Budget Responsibility estimates that the increase in thresholds will reduce the revenue raised by £607m in 2023. 40 Office for Budget Responsibility, Economic and Fiscal Outlook: March 2022, CP 648, The Stationery Office, 2022. However, the gross revenue from the levy (prior to the changes in thresholds) is forecast to be higher than expected in the autumn by around £700m. The net effect of these two changes means the levy is forecast to raise gross revenue of £18.4bn in 2023. 41 Office for Budget Responsibility, Economic and Fiscal Outlook: March 2022, CP 648, The Stationery Office, 2022.
In September, the government included an assumption that higher employer NICs would reduce future wage rises and business profits, reducing tax revenues overall by £3.2bn a year. Also, in addition to the revenue generated by the levy, a further £1.8bn of levy would be paid by public sector employers but this is assumed to have no net benefit for the exchequer because it is effectively the public sector paying tax to itself, and the government has said it will compensate departments for the extra cost.
In the October spending review the government confirmed the increases to health and social care budgets for the next three years. This included an extra £13bn a year raised by the levy. 42 HM Treasury, Spending Review 2021, HC 822, The Stationery Office, 2021.
Will revenue from the levy be ringfenced for health and social care spending?
Boris Johnson announced that the levy will be “hypothecated in law to health and social care”. 43 House of Commons, Hansard, ‘Health and Social Care’, 7 September 2021, col 153. A hypothecated, or ringfenced, tax is one where revenues are allocated for a particular purpose. The prime minister made this commitment to emphasise that the £12bn raised by the levy will be used directly to fund increases in health and social care spending.
However, hypothecation in this instance is essentially meaningless. The amount spent on health and social care in a given year will not be affected by how much the levy raises. While the levy is expected to increase health and social care spending by £13bn a year, total spending on health and social care in England alone amounts to approximately £235bn, with the gap covered by some of the other roughly £800bn per year that the government receives from other sources.** 44 The King’s Fund, ‘The NHS budget and how it has changed’ The King’s Fund, (24 March 2021) retrieved 17 September 2021, www.kingsfund.org.uk/projects/nhs-in-a-nutshell/nhs-budget; The King’s Fund, ‘Social care 360: expenditure’ The King’s Fund, (no date) retrieved 17 September 2021, www.kingsfund.org.uk/publications/social-care-360/expenditure That money can be spent on any of the public services or social security that the government funds.
As such, while funds from the levy may notionally go to the NHS and social care (and stating this connection makes the new tax easier to sell to the public) the government could just as easily say that capital gains tax or vehicle excise duty revenue would go to the NHS and this would not change the economic reality.
**Includes extra funding for Covid-19
What about the devolved administrations in Scotland, Wales and Northern Ireland?
The new levy and dividend tax increase will be paid by taxpayers across the UK, as NICs (and the new levy) and dividend tax rates are UK-wide taxes. Increases in NHS and social care spending in England will increase the budgets of the devolved administrations through the Barnett formula, which calculates the devolved nations’ share of new public spending. This amounts to an extra £1.1bn for the Scottish government, £0.7bn for the Welsh government and £0.4bn for the Northern Ireland executive.***
Normally, the devolved administrations have autonomy over how to spend any additional resources they are provided through the Barnett formula. However, as the money raised by the levy is ringfenced for health and social care, the Westminster government will require that the extra money is spent on health and social care in the devolved nations too. On the surface, this overturns the Sewel convention: that Westminster cannot make spending decisions for the devolved administrations. However, in practice this will not be strict hypothecation either. The governments in Scotland, Wales and Northern Ireland could ‘spend’ the extra money provided by the levy on health and social services but then reduce the money from other sources that is allocated to health and social care – and instead shift that to other services or to fund tax cuts.
***Includes UK-wide spending on vaccination programme.