Impact of the UK’s new Health and Social Care Levy Bill on expatriates

In response to the unprecedented spending on public services during the recent pandemic, the UK government has introduced a 1.25% health and social care levy applicable to every person liable to National Insurance Contributions (NIC), including self-employed individuals and internationally mobile employees (IMEs). Where employees are concerned, employers will also be required to pay the levy.

The 1.25% levy effectively applies from 6 April 2022 via an increase in the rate of NIC. However, from April 2023, the NIC rate will drop back to its current level, and the levy will be collected under a set of regulations that are yet to be published.

Expatriate considerations

The levy will not apply to the earnings of IMEs who have a certificate of coverage, an A1 in place, or fall outside the scope of UK social security regulations under the ‘first 52-week’ rule.

Conversely, IMEs outbound from the UK remaining subject to NIC will become liable to the levy, even though they are not resident in the UK.

As the levy will be payable in respect of employees that are liable to NIC, there is little action that employers need to take in relation to its IMEs. However, employers should consider the increased assignment costs that may arise where employees are tax equalised; and whether policies and processes should be updated to account for grossed-up costs and hypothetical withholdings.

Foreign tax credit relief

As the 2022/23 levy will be administered via an increase in the NIC rate, the position regarding foreign tax credit relief is clear. The levy is a social security insurance payment that is not available for credit against foreign taxes, nor is it possible to credit foreign taxes against the levy.

However, from 6 April 2023, it is unclear whether the levy will be considered as a creditable tax or not. The bill and guidance issued by the government on this are somewhat contradictory. The levy is referred to as a ‘tax’, but it will be used to fund health care and social care in the UK and is being aligned more closely to social security.

Similar charges in other countries are treated in varying ways. For example, in Germany, employees make contributions into a long-term care insurance plan to provide for nursing care in old age, which is a social security insurance payment that is not creditable against UK income tax. However, the Irish universal social charge is a tax on income that is creditable against UK income tax.

As a next step, employers should now assess the impact of the levy on the costs of employing IMEs, and update policies and processes to account for its introduction and manage any equalisation costs.