Executive briefing – September 2021

UK tax changes – Health and Social Care levy

Earlier this week, the UK government announced a major policy programme to enable significant funding increases for health and social care. In order to deliver those proposed increases, a new UK-wide 1.25% ‘Health and Social Care Levy’ will be introduced from April 2022.

Although this is not directly an executive remuneration matter, it is a significant change in UK tax policy that is likely to have a material impact upon UK employers. Clearly, the impact of the change will vary considerably by business and low margin businesses with significant numbers of employees may be materially impacted. There are also some technical aspects of the changes that we think are worth considering.

Overview

The levy will initially be delivered via a temporary increase in National Insurance contributions (NICs) for 2022/23 tax year and then from April 2023 it will become a separate levy (see summary table below).

FIT high-level observations

• Lower net pay/ higher costs for companies: Increases in employee rates will mean that, all other things being equal, net pay for most UK employees will decrease from April 2022. In addition, UK employers will suffer higher costs from April 2022 due to the introduction of the levy (the employer contribution rate will increase from 13.8% to 15.05%). This could have a significant impact on businesses with a large number of UK employees in personnel-driven industries such as retail and hospitality.
• CGT pay arrangements look increasingly attractive: The introduction of the levy means that there is now a greater difference between aggregated income tax/ NICs/ levy rates and current CGT rates. For example, an additional rate taxpayer will have a combined marginal rate of 48.25% compared to top CGT rate of 20% (for most assets). Will this increase the motivation of executives to move from PLC to PE businesses (where CGT-structured incentive schemes are common)? Will this increase the willingness of Remuneration Committees to consider CGT-structured schemes for PLC executives?
• Timing considerations: The initial rate increase for NICs is due to take effect from April 2022 (subject to the parliamentary approval process). As a result, we anticipate that some companies and/or executives may want to understand if they could and/or should receive bonus payments or exercise share awards before the rise in rates takes effect particularly with shares which have vested but are subject to holding periods. Each case will turn on its own facts but, in our experience, it will depend upon what the executive intends to do with the shares once they have exercised, e.g. sell to cover and hold, sell all, etc.
• Employer NICs transfer: Companies are currently able to transfer the employer NICs charge on certain employee share awards to the employee (so that the employee pays both NICs charges). The introduction of the new levy is to be implemented by a temporary increase in employer NICs for one year (2022/23 tax year) and then a separate new levy will be introduced from April 2023 (and the employer NICs rate will revert to its current rate). That means that where employer NICs have already been transferred on awards, some employees could be hit by a higher NICs charge if their award matures in 2022/23, i.e. when the higher rate applies but not if it is exercised earlier or later. Companies will have to look at the details of each case, because some transfers are capped (e.g. at 13.8%), whereas others are potentially uncapped.

Introduction of the levy will be subject to UK parliamentary process which means that the final details may change. Moreover, a UK Budget is also scheduled at end of October so there may be further UK tax developments in the pipeline. We will continue to monitor these and provide updates.

The above are high-level observations and if you would like to discuss any of them in more detail, please get in touch with your regular FIT contact.

If you wish to discuss anything arising from this briefing, please ask your usual contact at FIT or call us on 020 7034 1111 or email us at Info@fit-rem.com. 

This paper is intended to be a summary of key issues but is not comprehensive and does not constitute advice. No legal responsibility is accepted as a result of reliance on the contents of this paper.

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