ARTICLE
National insurance contributions increase – what does it mean for you?
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n his Spring Statement on 23rd March, Rishi Sunak confirmed that the government will press ahead with its decision to use National Insurance Contributions (NICs) as a tax to help raise £36bn to fund the costs of the NHS, health and social care, referred to as the ‘Health and Social Care Levy’. Under the change, employers and employees will each be taxed an additional 1.25 percentage points. The rule change will come into effect on 6 April 2022, at the start of the new tax year. However, it was also announced that the annual National Insurance Primary Threshold and Lower Profits Limit will increase from £9,880 to £12,570, aligning it with the income tax personal allowance from July, being the earliest date that will allow all payroll software developers and employers to update their systems and implement changes. The government argues that a typical employee will now be saving over £330 in the year from July and about 70% of NICs payers will pay less NICs, even after accounting for the introduction of the Levy. These measures come at a time when businesses and employees are struggling with ongoing rises in the cost of living, an energy costs crisis and projected increases in inflation to above 10% in the next three months.
Employers and employees currently pay Class 1 National Insurance; based on how much an employee earns. The rate is 13.8% for employers, while employees pay 12% of their earnings, up to £50,000 a year. Anything earned over this amount is taxed at 2%. March’s addition An additional layer has been added which means the thresholds for paying National Insurance Contributions have increased from £9,880 to £12,570. It is thought that 70 per cent of people will pay less NI in July 2022 than they did in March 2022. That means that anyone earning around £37,000 or less may not feel the pinch from the hated NI increase from July onwards, but the top-earning third of workers will pay more. What might the long-term effects be? As an employer, looking ahead, you may need to cut back on other spending to fund the change and the new rules could impact employee benefits. This could lead to difficulties in recruitment and retention.
Employers will have to contend with issues around staff retention and a national shortage of labour, coupled with the implications of Brexit and right to work checks which make employing nonUK passport holders increasingly complex.
Taking into account that it is not just employees who pay National Insurance but also employers, this tax increase could be translated into the form of lower wages or higher prices that may not be sustainable for small businesses in the long term. SMEs generate 50% of GDP and 60% of private sector employment; the economic recovery relies on small business to bounce back. Timing is everything and an immediate rise could dampen down the recovery.
THE NEW RULES EXPLAINED
HOW CAN YOU PREPARE FOR THE CHANGE?
The 1.25 % increase by itself As every business knows, National Insurance Contribution is a tax paid by employers and employees on earnings. It is automatically deducted from workers’ pay via the pay as you earn (PAYE) tax code and goes straight to HM Revenues and Customs (HMRC).
Review remuneration and consider communications SMEs should review their remuneration packages in light of these proposed changes and look for ways to minimise the effects of the proposed cost increases. It may be that the changes only affect most of your employees negatively for two months.
20 | HAMPSHIRELEGAL
