You’ll no doubt have seen the news of a rise in both employee and employer National Insurance Contributions (NIC). It’s been a contentious move by the Government, with some people seeing the policy as a necessary way of generating extra revenue for the NHS and social care, and others questioning whether a tax on workers is a positive step at this stage of the pandemic.
Regardless, the NIC rise is on its way and it’s going to have a significant impact for you and your workforce. We’ve highlighted the main changes so you can prepare for them as best as possible.
When will National Insurance Contributions increase?
As part of the Health & Social Care plan announced on 7th September 2021, NIC rates are scheduled to increase by 125 basis points from April 2022. The additional element will be split out into a stand-alone ‘Health and Social Care Levy’ from April 2023. The thresholds that apply are those currently in use, but any additional changes will be announced in the Autumn Budget which is due on 27th October 2021.
The effect on individuals
Let’s start by looking at individuals and how the National Insurance increase will impact salaries, dividends and those in self-employment.
For employees with annual earnings between £9,568 and £50,270 the National Insurance rate increases from 12% to 13.25%, an increase of 10.4% above current levels. On earnings over £50,270 the rate is over half as much again, changing from 2% to 3.25%. For example:
- For a salary of £30,000 p.a. NIC goes from £2,452 to £2,707
- For a salary of £60,000 p.a. NIC goes from £5,079 to £5,709
- For a salary of £100,000 p.a. NIC goes from £5,879 to £7,009
Retirement age workers
People still in employment after the state retirement age will be subject to the 1.25% charge for earnings above the primary threshold (currently £797 per month) from April 2023, where the extra charge is split out into a separate Health and Social Care Levy.
If you receive dividends from a company, the NIC changes will affect this. For dividends taxed in the basic rate band, the rate increases from 7.5% to 8.75%. In the higher rate band, it changes from 32.5% to 33.75%. And in the top (additional rate) band, the charge increases from 38.1% to 39.35%.
If you’re self-employed, your class 4 NICs will increase from a rate of 9% to a rate of 10.25%. That’s an additional charge of 13.9%, with the higher rate charged on income in excess of £50,270 increasing from 2% to 3.25%, which works out as an effective hike of 62.5%.
Self-employed with employees
If you’re self-employed and have employees working in your business, you’ll also be subject to the same additional costs as any other employers – see below.
The effect on businesses
There are also multiple impacts of the National Insurance increase for employers.
If you’re an employer with workers on the payroll, the employer rate of NI increases from 13.8% to 15.05% for all income per employee above £8,840 per annum – so this becomes an effective increase of over 9%.
The employer’s allowance, which for many businesses will cover the first £4,000 of some company National Insurance costs, is still available. The allowance will be extended to cover the new Health and Social Care Levy when that becomes a separate item.
The class 1A rate which employers pay on many fringe benefits, such as company cars and private medical insurance, increases from 13.8% to 15.05%. Where PAYE settlement agreements are in place, the class 1B rates increase in the same way.
If you have any overdrawn directors’ and shareholders’ loans which give rise to a Section 455 charge, the rate at which that is levied will change from 32.5% to 33.75%.
How will the changes impact your business’ financial plan?
If you’re a limited company, your National Insurance bill will increase by about 9% over current levels, assuming that everything else stays the same. For most unincorporated businesses, the main impact will come from the change in your class 4 National Insurance. Contributions will increase by a minimum of 13.9%, with the higher rate charged on income in excess of £50,270 increasing from 2% to 3.25% – that’s an effective hike of 62.5%, which will need to be factored into your business’ financial plan and budget.
Talk to us about preparing for the NIC changes
To make sure you’re prepared for the NIC increase, it’s important you work the changes into your business’ financial plan for 2022. With the use of advanced forecasting software and their specialist knowledge, our team of chartered accountants in Andover can help you create reliable forecasts and ensure you’re compliant in all the affected areas. They can also assist in obtaining funding for your business and reviewing its performance against budgets. To discuss the implications of the NIC rise for you and your business further and how Hyson can help you prepare for it, get in touch with us today.