What the National Insurance rate rise means for small businesses

National Insurance Increase

On 6th April 2022, the rate of National Insurance Contributions (NICs) paid by both employees and employers (Classes 1, 1a and 1b) will increase by 1.25%, the largest percentage increase since the introduction of National Insurance over a century ago. The increase will also apply to Class 4 contributions, affecting self-employed individuals.

Here, we explore the details of this major National Insurance rate increase and assess how it will affect small businesses up and down the country.

How much are National Insurance Contributions (NICs) going up by?

The majority of National Insurance contributions paid in the UK are known as Classes 1, 1a and 1b. They apply in the following way:

• Class 1 - paid by all PAYE employees under State Pension age earning more than £184 per week. This is automatically deducted by the employer.
• Classes 1a and 1b - paid by the employer on an employee’s salary/wage and any expenses, benefits and lump sum payments.

All of these NICs are increasing by 1.25%, meaning that:

• Class 1 increases from 12% to 13.25%
• Classes 1a and 1b increase from 13.8% to 15.05%

The other kind of NIC that is increasing are Class 4 contributions, which are paid by self-employed individuals. They will increase from 9% to 10.25% on all profits over £9,880 per year. Class 2 contributions (the other type paid by self-employed individuals) are set at a flat rate and will not be increasing.

When is the National Insurance increase happening?

The new rates of National Insurance contributions will take effect from the start of the 2022/23 tax year, on 6th April 2022 and will last for one year. The increase, which breaks a manifesto pledge, was announced by the UK government in September 2021 in response to the financial pressure placed on the NHS by the Covid-19 pandemic.

However, since then opposition has grown amongst politicians, with the House of Commons passing a motion in March 2022 to cancel the planned increase. At the time of publication, this motion has not succeeded in overturning the policy.

What is the Health and Social Care Levy?

As mentioned above, the increase in National Insurance is technically only lasting for one year, from April 2022 to April 2023, aiming to raise an additional £11 billion in revenue. However, after that National Insurance contributions will go back to their previous level and a 1.25% Health and Social Care Levy will replace the increase in NI contributions. This means that the overall contributions that both employers and employees will pay will stay at the elevated level of 1.25% higher than before.

The additional money raised through the 2022/23 NI increase will go directly to support the NHS as it recovers from the immense pressure placed on it by the Covid-19 pandemic. From 2023, the new Health and Social Care Levy will be ringfenced and distributed to a variety of UK health and social care bodies.

Who is affected by the National Insurance rise?

Employers

All employers have to pay National Insurance contributions for each of their members of staff on payroll, whether part-time or full-time, permanent or temporary. This means that every small business with at least one employee is affected by the increase in class 1a and 1b NICs. We’ve detailed below just how much more an average business might have to pay for each employee below.

Employees

All employees who pay their tax via PAYE will see an increase on 1.25% in their class 1 NICs. As a small business, you will be responsible for deducting and paying this contribution on behalf of your employees via your payroll system, just as you normally do.

At the same time as National Insurance contributions are increasing, the threshold above which employees must pay NICs is increasing from £9,568 in 2021/22 to £12,570 in 2022/23. This, coupled with the increase in NICs themselves means that an employees earning the UK average full-time salary of £31,285 in 2022/23 will have to contribute £2,480 in NICs per year, a reduction of £126.

The self-employed

Class 2 NICs (paid primarily by self-employed individuals on lower incomes) are set at a flat rate of £3.05 per week (increasing to £3.15 in 2022/23), while class 4 contributions are included in the 1.25% increase. This means that those who work for themselves as sole traders and freelancers may also feel the pinch of rising National Insurance rates.

It is worth noting that class 4 NICs paid by self-employed people are also subject to the threshold increase to £12,570 announced in the 2022 spring statement. This will mean that low-income self-employed people are likely to see their NICs reduce from 2022/23.

How does the NI increase affect small businesses?

Based on figures published by the Office of National Statistics (ONS) at the end of 2021, the average full-time salary in the UK was £31,285, meaning that businesses would pay an average of £3,221.45 per employee, per year, an increase of £267.56 after the NIC rate rise.

This means that enterprises classified as small businesses with up to 49 employees could face a National Insurance bill increasing by over £13,000 per year after April 2022. Research suggests, however, that the average small business will face an increased tax burden of £3,000 per year once the new increase takes effect.

Furthermore, the 1.25% figure is a little misleading because both employer and employee pay the additional NICs, the total rise shared by all parties is 2.5%. Some businesses will choose to increase their employees salaries to account for the greater deductions and not affect their take-home pay. Because such a salary increase will itself attract more tax and National Insurance deductions, as well as workplace pension contributions, the real increase in cost to small businesses could be closer to 3.5%.

How much will employer National Insurance contributions be increasing per employee from April 6th 2022?

†The National Living is increasing from £8.91 per hour in 2021/22 to £9.50 per hour in 2022/23. The value of an annual salary on The National Living Wage is calculated based on full-time employment of 35 hours per week.

At a time when businesses are facing rising energy prices and rising wholesale prices across the board, this additional cost will be difficult for some small businesses to swallow. Indeed, an increase in redundancies is a distinct possibility for the small business community, with the Federation of Small Businesses (FSB) estimating that unemployment will see a net rise of 50,000 because of the higher tax burden on businesses, in research published by the Telegraph. So, what are some of the ways in which small businesses can reduce the negative impact of the NIC increase in April 2022?

Employment Allowance for small businesses

One important method that small businesses can use to mitigate the effect of the National Insurance rise is the Employment Allowance. The rules for employment allowance eligibility mean that if you’re a small business with a National Insurance liability of under £100,000 for the previous tax year, then you can reduce your liability by up to £4,000.

This figure is rising to £5,000 in April 2022, meaning small businesses will be able to claim a greater reduction in their National Insurance liabilities from the 2023/24 tax year.

What’s more, you can also claim back your Employment Allowance for up to the previous four years (back to the 2017/18 tax year). If your small business has not claimed your full Employment Allowance, then it is possible that the amount you will be able to claim will offset the increase in National Insurance contributions.

Excemptions from the National Insurance increase

Employers of certain types of staff are excempt from the increase in NICs, although they will still have to continue paying employer’s NICs at the current rate. These include:

• Apprentices under the age of 25 (earning less than £50,270 per year)
• All employees under 21 (earning less than £50,270 per year)
• Armed forces veterans (earning less than £50,270 per year)
• Employees in Freeports (earning less than £25,000 per year)

Salary sacrifice

One way to mitigate the increase in National Insurance contributions that relatively few small businesses take advantage of is the principle of salary sacrifice. The method is relatively simple, entirely legal and beneficial to both employers and employees. These schemes work in the following way:

• Employees agreeing to reduce their gross salary by the amount they would normally contribute to their workplace pension
• The employer agrees contractually to increase their pension contribution by the same amount
• The employee pays less National Insurance because their gross salary is lower.
• The employer does not have to pay NICs on the pension contribution
• The employee’s overall take-home pay is not affected and their pension pot still builds at the same rate

For any small business considering using a salary sacrifice scheme to minimise the impact of the National Insurance rise, you should be aware that it is not always possible for employees at or close to the living wage, an it can only be entered into with the express agreement of both the employer and employee and your staff should be signed up to a scheme without their consent.

Read more about how salary sacrifice schemes work.

So, there you have it, a quick guide to the increase in National Insurance rates in 2022, how it affects small businesses and what you could do to mitigate the negative consequences of this new tax.

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• Tax guide for self-employed professionals
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