National Insurance will undergo major changes from April 2022, with an initial contribution rise of 1.25%, affecting employers as well as employees. According to the new figures, employers and employees will be expected to pay approximately £6.5 billion and £4.3 billion respectively.
Rishi Sunak, who gave the Spring Statement on Wednesday 23 March 2022, announced that from July 2022, the national insurance threshold will change. Lower earnings limits will increase by £3,000, bringing them in line with income tax thresholds. This means you will not pay NICs unless you earn more than £12,570 – up from £9,568 in 2021-22.
In spite of this increase, 70% of those who pay National Insurance will pay less - around £330 on average - thanks to the higher threshold announced during the Spring Statement.
CFOs and finance teams should now identify what steps they will have to take to manage the increase in business expenses along with the necessary payroll adjustments, so they are prepared in time for the upcoming changes.
Read on to find out how this will affect businesses and what finance teams can do to prepare for the rise.
Main changes
6th April 2022 - If your business is in the national insurance classes of Class 1, Class 1A, or Class 1B, the amount will be raised by 1.25% for both employee and employers and dividends will increase by 1.25%
6th April 2023 – National Insurance contributions will go back down to 2021-22 rates, and the extra 1.25% will be collected as a separate Health and Social Care levy, which will also be paid by state pensioners
Why is National Insurance rising?
This National Insurance rise is being implemented by the UK Government to raise an additional £36 billion for the NHS over the next three years with the aim that this additional resource will reduce wait times at hospitals.
Despite the Government's initial plans to not raise income or National Insurance taxes to address social care issues, the COVID-19 crisis has added immense pressure to the NHS and forced an immediate funding solution.
The tax is being levied across the whole of the UK and the income from this will be distributed across the four nations, particularly looking to deal with the NHS treatment backlog and social care reform in England.
What does this mean for employees?
Individuals over the age of 16 must pay National Insurance Contributions (NICs) in order to qualify for certain benefits and the State Pension.
The increase in National Insurance means that someone earning £30,000 will pay £53 less overall over the course of the 2022-23 tax year than they would have in 2021-22 (£2,398 instead of £2,452). Those who earn more than £34,261 will pay more National Insurance this year, and those who earn £50,000 will pay an extra £197.
For employees paying Class 1 contributions, this is how NI will be charged:
|
2021-22 rates |
2022-23 rates 6 April – 5 July |
2022-23 rates 6 July onwards |
|||
|
Earnings |
Class 1 rate |
Earnings |
Class 1 rate |
Earnings |
Class 1 rate |
|
Less than £9,568 |
0% |
Less than £9,880 |
0% |
Less than £12,570 |
0% |
|
£9,568 - £50,270 |
12% |
£9,880 - £50,270 |
13.25% |
£12,570 - £50,270 |
13.25% |
|
More than £50,270 |
2% |
More than £50,270 |
3.25% |
More than £50,270 |
3.25% |
What does this mean for employers?
It is the employer's responsibility to deduct income tax and National Insurance from an employee's wages. In addition, they are responsible for paying employer National Insurance contributions.
From April 2022, employers' National Insurance contributions will also increase by 1.5%. This means the rate for employers will stand at 15.3% on all earnings above the secondary threshold for most employees.
Paying NICs is compulsory for employers if their employees earn more than £8,840 per year (£9,100 from April 2022). Currently, employers pay 13.8% of NICs. In April 2022, employers will also have to pay 1.25 percent more in NICs, making it 15.05 percent.
For employers, the increase is being introduced at a time when businesses are preparing themselves for a jump in corporation tax from 2023.
To get employers up to speed, here is an update on the increase in rates
- Earnings between £9,564 and £50,268 will be taxed at 13.25% instead of 12%
- Tax rates on earnings over £50,268 will rise from 2% to 3.25%
- Employer contributions for employees earning over £170 per week will increase from 13.8% to 15%
For example, an employee earning £30,000 a year will pay an extra £214 whereas an employee earning £80,000 a year will pay an extra £839.
if their employees earn less than £50,270 (or £25,000 for Freeport employees) if they fall into one of the following categories.
Employers will not have to pay the extra 1.25% if their employees earn less than £50,270 (or £25,000 for Freeport employees) if they fall into one of the following categories:
- Apprentices under the age of 25
- Employees under the age of 21
- Armed forces veterans
- Employees in freeports
Existing employer reliefs and allowances that apply to National Insurance contributions will still apply.
What impact could the National Insurance rise have on businesses?
There are concerns from businesses that the new tax will slow job growth or even cause unemployment to rise. It was announced by Prime Minister Boris Johnson that 40% of businesses would be affected by the employment allowance, which waives the first £4,000 in employer NICs for businesses with less than £100,000 of total NICs liabilities.
As employers consider hiring new workers or investing in their growth plans, the impending National Insurance increase comes at a difficult time. Business owners may be forced to scale back plans to hire new employees or raise wages. Others may be forced to cut wages.
Another area the new rules will impact is employee benefits. Employers will likely have to cut back on other spending – such as defined contribution pensions – to fund the changes which could lead to difficulties in recruitment.
How can finance teams prepare for the National Insurance rise?
It is vital that CFOs start looking at their planning and forecasts, as well as charting how the National Insurance increase will affect other expenses. This should include identifying how to soften the impact of the rise in break-even points as well as potential mitigation measures. For example, this could mean investing more in order to boost sales, but on the other hand, it could also mean making cuts and spending less elsewhere.
Keeping a close eye on cash flow management will help the finance teams stay on top of what's coming in and going out of the business. A robust Cloud accountancy software system that hosts all financial data in real-time will also enable finance teams to carry out financial, planning, and analysis (FP&A), forecasting, and scenario planning to help inform accurate C-Suite decisions.
Bottom line, if your finance team doesn't have the correct and up to date financial data to hand, it'll be like steering a ship blind in terms of your business' future.
Here are six ways finance teams can prepare for the rise in National Insurance
1. Adopt a Cloud accounting software solution
Having a clear understanding of your current financial situation is one of the best ways to prepare for any change in income. You will need to investigate the costs your business will incur from the change to determine whether it can afford the new payroll.
For finance teams, having a reliable Cloud-based accounting software is a straightforward way of getting real-time analysis of the figures. Additionally, it ensures that you improve your compliance with HMRC and avoid costly mistakes in the long run.
2. Run a budget analysis
Look at your budget to determine how the changes will impact your company's bottom line as the first step. Is it going to be possible for you to afford the higher NI contributions or will you have to make changes? A thorough understanding of business finances and the budget will help you decide what steps to take to reduce your business's costs in the long term
3. Prepare your employees
There may be a lack of awareness on the part of employees regarding the changes to come and how their contributions will increase at the same time. Staff should be informed of the changes so they understand why their pay slips may look different after 6th April and have ample time to update their personal budgets.
4. Contact your customers
There's a possibility that you'll have to raise your prices if the new NI contributions squeeze your profit margins. Even though this is usually a last resort option, if it's something you choose, be sure you give your customers plenty of notice as well.
The results of these changes will be felt by everyone in the working world, so allowing customers time to adjust their finances is also crucial. By approaching this correctly, you will be able to adjust the price of your products and services smoothly.
5. Re-examine your employer pension contribution
A salary sacrifice scheme cuts your salary and pays it into your pension, which is tax and national insurance-free.
Pension contributions can be made in two ways:
- Relief at source method - Contributions are deducted from the employee's net salary, after income tax has already been deducted.
- Net pay method - The full amount of the pension contribution is taken from your pay before tax is deducted. Often this is done through a salary sacrifice scheme and can help save some national insurance tax.
You will likely save your employees money on National Insurance by offering a salary sacrifice scheme for pension contributions. They will accept a reduction in salary and request that you pay the difference directly into their pension.
In essence, this is a good way to reduce the total amount you and your employee pay on national insurance since you will both earn a lower salary/profit.
6. Find other ways to reduce costs
To prepare for the increase in National Insurance costs, you can look to reduce costs in other areas of your business.
Here are a few areas to consider:
- Tax breaks for green energy - As the UK strives to attain Net Zero, more and more incentives are becoming available for business that pursue greener practices. Several types of financial assistance are available, with the UK Government Green Business Funding and Zero Carbon Business Grants List both being a good place to start.
- Employer's Allowance allows employers eligible to reduce their National Insurance liability by up to £4,000 annually. You will pay less employers' Class 1 National Insurance when you run your payroll until the £4,000 has been paid or the tax year has ended (whichever is sooner).
- Tax relief schemes for specific sectors - Certain sectors have specific tax relief schemes that may help if you qualify.
Rise to the top with Advanced Financials
The additional funding for health and social care is a welcome decision, however, the rise in National Insurance is yet another hurdle for businesses to overcome. The good news is that the economy is continuing to grow and, while they’re not out of the woods yet, businesses are in a much better financial situation to handle the new rates than they were this time last year.
Our Advanced Financials accounting software enables finance teams to stay on top of all accounting functions easily and accurately by hosting all your financial data in real-time. By automating manual processes, finance teams can carry out value-adding projects around the rise in National Insurance that could include FP&A, forecasting, and scenario planning to help guide the CEO to make accurate business decisions.
Taking early action will help finance teams be better equipped for 6th April 2022 and will minimise the impact of the transition period. That will mean that employers can concentrate on preparing their businesses to handle other challenges and to make the most of new opportunities in 2022 and beyond.
Find out how Advanced Financials can empower finance teams by being prepared for any future challenges by speaking with one of our experts today.