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National Insurance Hike - Your Complete Guide



Way back in September 2021, to pay for increasing social care costs, the Prime Minister revealed plans to increase National Insurance by 1.25% from April 2022. Since the PM's announcement, swirling rumours and muted rebellions have failed to dissuade the Government from persevering with what is a controversial tax increase.


Last week, a Labour motion to scrap the planned rise received majority support from MP's but was symbolic in nature and not binding. As such, we're encouraging clients to continue with their preparations for Wednesday 6th April 2022.


At the same time, it's been a while since the PM's announcement, so we thought it would be useful to recap on the key facts and considerations surrounding the impending changes.


NIC Basics


National Insurance 'NI' is a tax which contributes towards the state benefit and state pension systems. The tax is paid by employers and also employees, through their salary. NI is automatically deducted from employee pay via the PAYE payroll system and goes straight to HMRC.


For employers, the NI rate is currently 13.8%. For employees, any earnings above £9,568, are charged at 12% up to £50,270 per annum. Any salary above this threshold incurs a further 2% tax charge.

'Class 4' self-employed operators are charged at 9% - on any earnings above £9,568 - up to the £50,270 pa threshold and incur the same additional 2% tax charge for anything above this level. NI contributions are captured directly by HMRC through the Self Assessment system.


So What's Happening?


The 1.25% increase - taking affect from Wed 6th Apr 22 (start of the new tax year) - will affect employees (Class 1 Primary), employers (Class 1 Secondary) and the self-employed (Class 4) and is designed to fund the health and social care crisis following the COVID-19 pandemic:

  • From April 2022 – National Insurance will increase by 1.25%.

  • From April 2023 – The 1.25% will then be collected as a separate Health and Social Care levy, which will also be paid by state pensioners.

Employers pay a percentage of Class 1 National Insurance for each employee, depending on how much they earn. Following the rate change, employers will be expected to pay 15.05% (up from the existing 13.8% rate).


The proposed changes could make the process of hiring staff more expensive with employers forced to cut costs elsewhere to offset the increase - employee benefits, defined contribution pensions etc - which may consequently raise recruitment challenges.


For example, an employee on the living wage, based outside of London, would currently cost an employer just under £2,360 pa in National Insurance. However, following the 1.25% rise, this figure would increase to £2,655 pa.


That would mean an additional £260 pa cost to the employer. Multiply this by the number of employees within any given business and the additional costs soon mount up.


NB: 1.25% may look a small increase but it's estimated the new rates will cost employers around £6.5bn a year!


Are there any scenarios where this increase won't apply?

If an employee falls into one of the following categories, and earns less than £50,270 pa, existing NIC reliefs will apply for:

  • Employees under the age of 21

  • Apprentices under the age of 25

  • Armed forces veterans

  • Employees in Freeports

In addition, current employer NIC reliefs and allowances will also still apply.


Time is ticking so I'd appreciate some further guidance!


Full details on the forthcoming rise, and how this will affect your business, can be found on the Gov website here. We would also recommend engaging with your company accountant further direction on the new NIC rules and how they will impact your business.

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