23 March 2022
Today in his Spring Statement 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 today 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 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 non-UK passport holders increasingly complex.
The new rules explained
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).
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%.
An additional layer was added today 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.
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.
How can you prepare for the change?
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.
Are you going to leave pay as it stands with the effect that your employee will receive less pay after tax or can you increase pay or pay a bonus to cover the loss?
You may want to explain to employees that their take home pay may be less as a result of the change and then it may improve in July. Otherwise you may have to field a lot of queries on pay day in April.
One of the most important ways to prepare for any change is to make sure you have a strong understanding of your current financial position, working out what the additional cost to your business will be.
If the costs are going to be significant, you could consider passing the costs on to your customers by increasing prices.
Keep an eye on what your suppliers are going to do too as they may be passing the costs on to you.
Re-examine your employer pension contribution
Salary sacrifice schemes effectively cut salary and paying money into, for example, a pension, which is free of both income tax and national insurance might be an option.
If you offer your employees a salary sacrifice scheme for pension contributions, then they may choose to reduce their National Insurance bill by accepting a reduction in salary and asking you to pay the difference directly into their pension. It depends on their finances, but this is a good way to reduce the amount both you and your employee pays on national insurance.
Look at Ways of Reducing Other Costs
Flexible working policies give employers an opportunity to reduce building overheads and have the advantage of allowing employees to reduce their commuting costs. Those who commute by car will be grateful for the saving in fuel costs and time and others commuting by train will get welcome respite from the ever-increasing ticket prices and occasionally unreliable service.
During Covid-19 lockdowns, working from home has in many instances become the norm and these can harvest the rewards by using hybrid working policies to get the best of both worlds for employers and employees.
If you have any questions or would like advice about this subject, please contact Jacqueline Kendal by calling 01256 854626 or emailing [email protected]
Please call us or email and we’ll get back to you as soon as possible.
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