If you're an employer, the rate changes could make the process of hiring staff more expensive.
Looking ahead, you will likely need to cut back on other spending to fund the change.
Speaking in parliament on 7 September, Boris Johnson reveal plans to increase National Insurance contributions by 1.25 percentage points from April 2022.
This will affect employees, employers, and the self-employed across the UK and is designed to fund the health and social care crisis following the pandemic.
As every small business owner knows, National Insurance is a tax paid by employers and employees on their earnings. It is automatically deducted from workers’ pay packets via the pay as you earn (PAYE) tax code, and go straight to HM Revenue and Customs (HMRC).
Although the new social care reforms will apply only to England, the tax changes will affect the whole of the UK. But the income from the levy will be distributed across the four nations.
The increase will apply to: -
Class 1 (paid by employees);
Class 4 (paid by self-employed);
Secondary Class 1, 1A and 1B (paid by employers).
From April 2022:
The current 12% rate on earnings between 9564 pounds and 50,268 pounds will rise to 13.25%;
the current 2% rate on earnings over 50,268 pounds will rise to 3.25%;
employers will also have to pay more, contributing 15.05% in National Insurance on employees earnings over 170 pounds per week, up from the 13.8% now.
While newspaper headlines might refer to this as a 1.25% increase, the actual figure is an increase of 1.25 percentage points. However, the new rates actually amount to a 1.25% increase plus 9%.
The increase will not apply if you are over the State Pension age. If you're an employer, the rate changes could make the process of hiring staff more expensive. Employers pay a percentage of class one National Insurance for each employee, depending on how much they get paid. This could raise recruitment challenges or cause businesses to try to make savings elsewhere.
Another area the rules will impact is employee benefits. As an employer, looking ahead, you will likely need to cut back on other spending - such as defined pension contributions - to fund the change.
If you're a sole trader, the increase rates will be felt harder than most. Paying taxes through self-assessment means the rate is based on income after business expenses, so in reality it directly affects how much salary you can pay yourself.
You'll pay Class 4 National Insurance contributions if your annual profit is more than £9,568 (2021/22 tax year).
You'll still lose an additional 1.25 pence for every £1 earned. given you pay your own salary, a tax on earnings is therefore also a direct reduction of income.
The Levy will be paid by employed and self-employed individuals and partners earning above the Primary Threshold/Lower Profits Limit of £9,568 in 2021-22. In 2022-23, a typical basic rate taxpayer earning the median basic rate taxpayer’s income of £24,100 would be expected to pay an additional £180 and a typical higher rate tax payer earning the median higher rate taxpayers income of £67,100 would be expected to pay an additional £715.
A salary sacrifice arrangement is a tax efficient way to arrange contributions to your workplace pension, enabling you and your employees to pay lower National Insurance contributions the National Insurance savings can be significant for employers.