The impact of the new National Insurance changes

You’ll no doubt have seen the news of a rise in both employees’ and employers’ National Insurance contributions (NICs). 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 if a tax on workers is a positive step at this stage.

However, this increase in NICs is coming and will take effect from April 2022 – and it’s going to have a meaningful impact for you and your workforce. We’ve highlighted the main changes so you can be prepared and ready for the increase.

What do the National Insurance contribution changes mean?

As part of the Health & Social Care plan announced on 7 September 2021, National Insurance rates are scheduled to be increased 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 usage, but any additional changes would be announced in the Autumn Budget that’s due on 27 October 2021.

How will individuals be affected?

Let’s start by looking at the impact for individuals, and how the NIC changes will affect salaries, dividends and those in self-employment:

  • Salaries – 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:
    • Salary £30,000 p.a. NIC goes from £2,452 to £2,707
    • Salary £60,000 p.a. NIC goes from £5,079 to £5,709
    • Salary £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.
  • Dividends – if you receive dividends from a company, the NI 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%
  • Self-employed – 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 – where 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.

How will companies be affected?

There are multiple impacts of the NIC increase for individuals. But you’ll also be affected if you’re an employer:

  • 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%.
  • Employer’s allowance – 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.
  • Fringe benefits – the Class 1A rate which employers pay on many fringe benefits, such as company cars and (ironically) 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.
  • Directors loans – 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 planning?

If you’re a limited company, your National Insurance bill will increase by about 9% over current levels, presuming 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 financial planning and budgeting.

Talk to us about planning for the NIC changes

As your trusted adviser, we’ll help you understand the implications for you and your business so you can plan for the increases and work them into your planning for 2022. We will ensure you’re compliant in all the affected areas.