Puzzled about National Insurance contributions?

Well, it’s certainly been a bit of a rollercoaster ride when it comes to government policies surrounding National Insurance contributions (NIC). So, the big question is, just where did we end up?

Increasing thresholds

Cast your mind back to the start of the 2022/23 tax year and you might remember that we were looking at rates being raised by 1.25% as a precursor to the introduction of what was going to be a new tax, the Health and Social Care Levy (HSCL) in the 2023/24 tax year.

Before this tax year had even started, change was already on the cards – during his spring budget in March last year, the ‘then’ Chancellor, Rishi Sunak announced that NIC rates would be brought into line with income tax thresholds, with a new starting point of £12,570. For administrative reasons this would start at the beginning of July, three months into the tax year.

For most employed people, this would be quite straightforward – but for directors and the self-employed using the normal annualized basis, this would mean their hybrid starting point would be £11,908.

Changing chancellors and changing rates

Then came further change – a new prime minister in Liz Truss and her newly-appointed Chancellor Kwasi Kwarteng (both very short-lived) announced the increase in NIC would not be going ahead as planned.

Fast forward to Jeremy Hunt being appointed as Chancellor and despite most other changes announced by Mr. Kwarteng being reversed, Jeremy Hunt decided to stick with abolishing the HSCL increase. This meant that from 6 November 2022, NIC rates were reduced by 1.25%, back to 2021/22 levels. And that’s where we are today.

Again, this was straightforward for most employed people, but for those directors and the self-employed affected by the change, a hybrid rate of NIC would be applied – 9.73% for the self-employed and 12.73% for directors. In addition, higher earners would also be hit with a hybrid rate of 2.73%.

Employers’ contributions

For employers, their NIC contributions were reduced from 15.05% back to 13.8%. A special hybrid rate of 14.53% employers’ contributions applied to directors and for the annually calculated amounts Class 1A (on benefits in kind) and Class 1B (on PAYE settlement agreements).

Opportunities for planning

Now, these changes have provided some opportunities to plan ahead, especially for owner/directors who receive their income as a mix of salary and dividends. Here, there is the opportunity to increase the salary part of their income in line with the new £11,908 threshold, without incurring employee’s NIC. However, this might incur an employer’s NIC charge, as the threshold for that was not increased, though that might be covered by employment allowance for qualifying companies.

Similarly, for the self-employed, when considering claiming capital allowances, you should also bear in mind the new higher threshold to avoid wasting allowances. In the future, this will be much easier with tax and NIC thresholds being brought into line.

News on Class 2

Another point to remember regarding NIC in 2022/23 is that there are changes to how Class 2 (flat rate self-employed) contributions are assessed.

For those with profits between the small profits’ threshold of £6,725 and the hybrid lower profits limit of £11,908, Class 2 contributions will be automatically credited to a person’s NIC account with no need for any payment to be made. This is a major change, as in previous years there was no automatic credit, and a compulsory payment would have had to be made.

For anyone below the £6,725 small profits threshold, a voluntary payment will still be needed to get the Class 2 benefits.

A final word on dividends

Although not NIC-related, it’s also worth mentioning that the HSCL-related increase in the income tax charge on dividends was not abolished. This means that the basic dividend rate is now still 8.75%, with similar increases to the higher rate (33.75%) and additional rate (39.35%).

For more information or advice on any of the changes to NIC rates, HSCL matters and dividends, please get in touch – here at Westcotts, we have a team of experts and specialists who can help you to work through an often complex minefield of rates and charges, to provide you with complete peace of mind. We’re here to help.