National Insurance increase on the cards for 6 April 2022

National Insurance increase on the cards for 6 April 2022

Recently the Prime Minister has faced calls to re-think the proposed increase in National Insurance (NI) which was outlined by Rishi Sunak in his Budget in October 2021. The proposed measure will see NI rise by 1.25% on 6 April 2022, at a time when many families are continuing to struggle with the rising costs of energy and food. The measure has been described as “economically unwise” whilst the Institute for Fiscal Studies has indicated that there is sufficient “fiscal room” to merit a postponement of the increase.  However in January the Prime Minister and the Chancellor wrote a joint article in the Sunday Times confirming their commitment to this increase from 6 April 2022.

So what does this mean for business owners, their workforces and indeed the self-employed in the UK?

From 6 April 2022, there will be a temporary 1.25% increase in Class 1 NI both for employees and employers, as well as the same increase in relation to Class 4 NI which is paid by the self-employed. The threshold above which employees pay NI will rise from £9,568 in 2021/22 to £9,880 in 2022/23, however the upper threshold will remain at £50,270. That means £40,390 of earnings will be subject to NI at 13.25%, with any earnings over the upper threshold being charged to NI at 3.25% as opposed to 2% in the current year. The employer’s rate of NI will rise from 13.8% to 15.05% for earnings over £9,100 and it remains the case that there is no upper threshold for employer’s NI. For the self-employed, the main rate of Class 4 NI will increase from 9% to 10.25% for earnings in the same bracket as indicated earlier for employees, and NI will be charged on profits above the upper limit at 3.25%. 

The increase is regarded as temporary as NI limits will revert to their current levels on 6 April 2023, however at that time, the increase will be legislated separately as a new Health and Social Care levy. This will also apply to individuals working above state pension age, who are currently exempt from NI.

The impact of these changes will be widespread:

• Lower take home pay for employees, particularly those who are earning at the lower end of the spectrum, where a greater percentage of their earnings will go in NI.
• Cashflow issues for employers who will now pay more NI on the wages of their workforce.
• Greater need for prudent tax provisioning amongst the self-employed population, whose NI is collected as part of the self-assessment process.

There is a short window of opportunity between now and 5 April to ensure that employed earnings are not subject to the increased rates of NI. This might involve accelerating declaring and paying bonuses so that they fall into either the February or March payroll, and are therefore subject to current NI rates. The impact on director shareholders is not just limited to the increase in NI on their salary, as this is being coupled with an increase of 1.25% in the rate of tax applied to dividends they draw. It may also therefore be worth considering whether it is possible to declare an increased dividend prior to 5 April 2022, which will again be subject to tax at the current rate. If cash does not permit drawing the full amount of dividend, provided there are sufficient distributable reserves within the company, the dividend can be declared and left outstanding on a director’s loan account, to be drawn at a future date. 

For the self-employed who draw up accounts other than on the cash basis, and who have an accounting date between now and 5 April 2022, raising invoices in the next couple of months will ensure that the profits are subject to tax at the rates in place for the 2021/22 tax year. Many sole traders and partnerships provision so that monies are set aside on payment of each invoice to cover tax, NI and where applicable VAT. This will become increasingly important when rates rise, but also as we head towards a fiscal basis period for tax purposes for the self-employed which is set to come into force from 6 April 2024, with the 2023/24 year being a transitional year.

At the time of writing pressure is being piled on to the Chancellor, Rishi Sunak to scrap his plan to increase national insurance, especially in the wake of the recent interest rate rise. We would expect the increase to be re-confirmed in March as part of the Chancellor’s request to the Office for Budget Responsibility to produce an economic and fiscal forecast for 23 March 2022.

If you would like to discuss any of these opportunities, please get in touch with your usual tax advisor to see how we can help.