National Insurance Rise: What Does It Mean For Your Business’s Books?

Hear that collective groan across the country? That’s the sound of the latest National Insurance spike.

We all knew it was coming after the financial turmoil of the last couple of years, but it’s still a bitter pill to swallow!

As of April 2022, both employee and employer National Insurance contributions have risen, and knowing what this means for your business’s payroll is key to ensuring proper bookkeeping.

That’s why we’re breaking down what Sunak’s spike means for your business and employees, ensuring your payroll remains accurate and your accounts stay up to date.

What is National Insurance?

We all know that we pay it, and we’ve all seen it come out of our pay packet at the end of the month, but what are National Insurance contributions actually for?

Well, National Insurance is a mandatory tax paid on earnings by employees, employers and the self-employed. Applicable to all workers aged 16 and earning over £184 a week (or, for those self-employed, making over £6,515 of annual profit), these contributions are used to fund state benefits, including:

•  Pensions
•  Statutory sick pay
•  Maternity leave

In short? National Insurance contributions (NICs) pay towards a rainy day fund for workers to fall back on when they need to most.

The amount of National Insurance you pay will depend on what class you fall within - these National Insurance classes are determined by whether you’re an employee, self-employed or paying voluntary contributions.

Self-employed workers will pay their NICs alongside their Income Tax, with the total amount calculated based on their Self Assessment tax return.

Employers, on the other hand, will need to ensure employees’ Class 1 NICs are deducted directly from their salary via the PAYE system, while the rate the employers themselves pay is calculated based on payroll.

Finally, those with earnings lower than the National Insurance threshold have the choice to make voluntary payments to protect their National Insurance record - these are known as Class 3 NICs.

Why has National Insurance increased?

National Insurance rates increased in April 2022 upon the introduction of the Health and Social Care Levy, a new income tax used to subsidise increasing NHS and social care costs.

This spike is only temporary, with NICs set to return to previous rates in April 2023.

That’s not money back in the pockets of employers and employees, though. As of next year, the Health and Social Care levy tax will be deducted as a separate, independent tax paid alongside NICs and Income Tax.

The money raised by the National Insurance increase and Health and Social Care Levy will be distributed across the UK, with the following estimated funding by 2024-2025:

•  £1.1 billion to Scotland
•  £700 million to Wales
•  £400 million to Northern Ireland

What is the 2022 National Insurance increase?

Before April 2022, the standard Class 1 National Insurance rate sat at 12% on pay that falls between £797 to £4,189 a month (£184 and £967 weekly). An extra 2% was then paid for earnings that exceeded this threshold.

Self-employed Class 4 contributions were charged at 9% of annual profits between £9,569 and £50,270, plus the additional 2% rate for any profits that exceed £50,270.

Meanwhile, secondary Class 1 NICs were calculated at 13.8% per employee for anyone earning above £170 a week (£737 a month).

From April 6th 2022 (until April 5th 2023), employees, employers and the self-employed will all see their National Insurance rates rise by 1.25 percentage points:

•  Class 1 contributions (paid by employees) will rise from 12% to 13.25%
•  Class 4 contributions (paid by the self-employed) will rise from 9% to 10.25%
•  Secondary Class 1 contributions (paid by employers) will rise from 13.8% to 15.05%

Of course, this all amounts to a decrease in employees’ take-home pay, an increase in employers’ payroll taxes and, for most self-employed workers, a higher tax return in their next Self Assessment.

The Federation of Small Businesses (FSB) has predicted that, for the average small business, this could mean needing to find up to £3,000 extra to cover extra NICs.

Individuals who are above the age for State Pension won’t initially be affected by the National Insurance spike in 2022, but they will be liable to contribute to the Health and Social Care Levy from April 2023.

What does the National Insurance increase mean for businesses?

Among all the forecasts and predictions for the next year, there’s one central theme: we’re all going to be tightening our belts.

Whether it’s lower consumer spending, a rise in redundancies or SMEs offering fewer benefits and training opportunities (failing to attract talent as a result), National Insurance increases look set to impact small businesses more than any other.

In addition to obvious financial impacts, there may also be practical implications for small businesses, too.

Business owners will need to perform new compliance calculations on their staff payroll, for example, as well ensuring their payroll systems and bookkeeping practices are up to date with the latest rates and practices.

These changes are going to affect everyone from the top down.

While some businesses are choosing to absorb these NIC increases or compensate their employees for the spike, others are unable to - meaning it's vital you take the time to consider the impact that the rise will have on your business roadmap.

Alternatively, you could let the professionals plot your best course of action - drop us a line if you need a helping hand.