From April 2022, the rate of National Insurance contributions you pay will increase – while the employee will feel the change in their pay packet, employers will also feel the burden. The amount is increasing by 1.25p in the pound for both employers and employees.
This will also be the case for the self-employed. Employees pay National Insurance on their wages, employers pay extra contributions for staff, and the self-employed pay it on their profits.
The reason for this rise, the government says, is to help bolster health and social care budgets by adding more than £11 billion this year to ease the pressure on the NHS and help it recover from the Covid-19 pandemic.
What does this mean in real terms?
It depends on the size of the organisation, the number of employees and the salary of the employee, but UK businesses are set to stump up an extra £6.5 billion a year and employees would pay an additional £4.3 billion. On average, for an employee whose received the recent increase in the National Living Wage (outside London) the annual contribution would be an extra £212.95 and for the employer, an extra £241.88.
Getting prepared for the changes
Firstly, you should make sure that your payroll software is updated accordingly in line with the government changes – this should be done before running the monthly payroll. Wherever possible, it is always worth double-checking payslips carefully and getting prepared to answer questions from employees.
Many payroll software programmes can add notes onto payslips – this is especially important for those employees whose salary remains unchanged, they will see a slight reduction in their net earnings. The note is useful in explaining the 1.25 percent increase to National Insurance payments.
Small to medium businesses should remember they are eligible to claim the Employment Allowance which increased in April from £4,000 to £5,000 – you can claim Employment Allowance if you are an individual business or charity, and your Class 1 employer NI liabilities were less than £100,000 in the previous tax year. This allowance has been raised to offset the NI increase, reducing the employer NI total against the PAYE liability. When the payroll is processed, you will receive or produce a report detailing your allowance.
EA was first introduced in 2014 and has increased year-on-year, so it is also worth noting you can claim backdated Employment Allowance for the previous four tax years which could be a considerable sum for SMEs, potentially up to £14,000. It is wise to use the full allowance because if you don’t, it is not carried forward.
Better news on the horizon
Although these increases will be another squeeze on income and further pain in the overall cost of living for many employees, it must not be forgotten that in July, this pressure will ease a little when there is a considerable jump in the threshold for when employees start paying National Insurance. From an employers’ perspective it is hoped the Employment Allowance will offset the pain. The government claims that with July’s threshold increase, anyone earning £34,000 or less will end up better off. It is important to remember to look at the entire year, not just what is happening in the next few months – you could argue the government’s approach is one of ‘short term pain, long term gain.’
Another piece of good news is that the level for qualified earnings for workplace pensions has not increased (it remains the same), which means your pension contributions have not declined, as they may have done in previous years – a bonus for long-term planning!
Overall, I think that employers have been hit the hardest, in particular the SME’s – the changes impact them more. I fear that if employers are having to stomach the biggest increases, it could impact their ability to offer pay rises. To offset the NI may limit their potential to boost their employees’ earnings, effectively amounting to a ‘pay freeze.’ Only time will tell whether this freeze will start to thaw later in the year.