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How will the new Health and Social Care Levy impact on household incomes

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Analysis using UKMOD, the freely accessible tax-benefit model for the UK and its constituent nations, show that the new Health and Social Care Levy, involving a 1.25 percentage points increase in National Insurance Contributions, will bring to the Government coffers almost £19 billions in 2022 alone. (This is roughly consistent with the OBR estimates, which report a lower average figure for 2022-2025, but acknowledge a decreasing profile over time).

This will increase the average tax burden of the UK taxpayers by 0.8 percentage points in 2002.

Despite the flat nature of the levy, due to minimum thresholds for paying NICs this additional tax burden increases with income, from 0.1 percentage points in the poorest income decile, to 1.1 percentage points in the richest income decile:

Household disposable income and corresponding increase in tax burden

Decile 1 0.1pp
Decile 2 0.2pp
Decile 3 0.3pp
Decile 4 0.4pp
Decile 5 0.5pp
Decile 6 0.6pp
Decile 7 0.7pp
Decile 8 0.8pp
Decile 9 0.9pp
Decile 10 1.1pp
All 0.8pp

As a consequence, household disposable income will go down by almost 1% in 2022, a loss of £355 per family on average. The profile of this loss is again increasing with income: Household disposable income Losses

(£ per year) Losses (%)
Decile 1 -11. -0.11%
Decile 2 -32 -0.18%
Decile 3 -62 -0.29%
Decile 4 -101 -0.41%
Decile 5 -167 -0.58%
Decile 6 -246 -0.73%
Decile 7 -347 -0.88%
Decile 8 -490 -1.06%
Decile 9 -678 -1.22%
Decile 10 -1,470 -1.64%
All -355 -0.98%

Almost 15% of households in the poorest deciles will lose out due to the new levy, with the fraction of losers going up to 85% in the richest decile. On average, 57% of household will have to pay more taxes: Household disposable income % of losers

Decile 1 14.4%
Decile 2 30.7%
Decile 3 39.9%
Decile 4 48.4%
Decile 5 57.7%
Decile 6 66.5%
Decile 7 74.3%
Decile 8 79.8%
Decile 9 82.9%
Decile 10 85.3%
All 57.2%

Due to its progressive nature, the new levy will slightly decrease inequality in the UK, lowering the Gini coefficient by 0.3 Gini points.

However, the reduction in disposable incomes will slightly increase poverty rates, from 16.2% to 16.3% with a fixed poverty line at 60% of the median equivalised disposable income before the reform.

Poverty will increase more for households with children. Pensioners on the other hand will be unaffected.