It’s a move that’s been criticised by employees and small business owners alike and been described as an “unfair job tax”. Yet, due to the economic turbulence of the last two years, Chancellor Rishi Sunak has stated that changes to National Insurance are required to fund the NHS and health and social care costs in the UK and increases will come into effect from April 2022.
So what does that mean for you as a small business owner? How will the National Insurance increases affect you and your employees? And how can you make the change easier to handle?
We outline the basics for you here.
What is National Insurance?
National Insurance contributions are a tax paid on employee earnings and self-employed profits, paid by employees, employers, and the self-employed. Contributions are mandatory for those who are aged 16 or over and are either an employee earning over £184 a week or are self-employed and generating an annual profit of £6,515 or more. Employer’s NI applies to most, but not all, of the staff you hire as employees.
The National Insurance payments you make determine your eligibility for certain state benefits like the State Pension and Maternity Allowance. If at any point, your earnings are lower than the National Insurance threshold, you have the option of making voluntary payments to protect your National Insurance record.
There are four different classes of National Insurance, and the Classes you pay will depend on whether you’re an employee, self-employed, or electing to pay voluntary contributions.
If you’re self-employed, your contributions are calculated based on your Self Assessment tax return and paid alongside your Income Tax.
If you’re a small business owner who employs staff, you’ll need to ensure your employees’ Class 1 contributions are deducted from their monthly/weekly salary via the PAYE system. This might sound like a daunting task, but with online payroll software like Clear Books, you can calculate employees’ and Directors’ NI contributions with ease, as well as report the figures directly to HMRC. Employer’s NIs are also calculated by Clear Books payroll.
What are the 2022 National Insurance increases?
Currently, the NI rates for most employed people are 12% on pay that falls between £184 and £967 a week (or £797 to £4,189 a month) with an additional 2% paid on earnings over £967 a week.
Self-employed NI rates are generally similar to those for the employed at 9% on annual profits between £9,569 and £50,270, and 2% on annual profits over £50,270.
NI rates that businesses pay on their payroll wages are currently 13.8% above £170 a week (£737 a month) per employee.
However, from 6 April 2022 to 5 April 2023, National Insurance contributions will increase by 1.25% and will apply to:
- Class 1 contributions (paid by employees);
- Class 4 contributions (paid by the self-employed); and
- Secondary Class 1, 1A, and 1B contributions (paid by employers).
This means that for most employees their take home pay will decrease, most self-employed will have more to pay in their self assessment tax return, and for most businesses their payroll taxes will increase.
What does the increase mean for small business owners?
Estimates suggest that the increase could cost employers around £6.5bn, while staff members would pay an extra £4.3bn. For the average small business, that may mean having to find an extra £3,000 to cover NI payments, according to the Federation of Small Businesses.
Such a steep rise in tax responsibilities has been strongly criticised both by economists and the media. With a tough two years behind us, extreme hikes in energy costs also expected to hit in April, and inflation at a high, it is thought that small businesses will be the hardest hit due to having fewer assets and less available cash flow than larger organisations.
Experts predict that the increases will lead to higher consumer prices and a significant rise in redundancies as smaller firms are unable to support the costs of their current roster of employees. There are also concerns that companies will struggle to retain essential employees or attract new talent if the financial squeeze subsequent cost-cutting translates to fewer benefits or training opportunities.
As well as the financial impact, small business owners will need to perform the new calculations on their staff payroll to be compliant with the changes.
Mitigating the effects of the National Insurance increases
While it’s not exactly the news small business owners were hoping for, there are things you can do to mitigate the potentially damaging effects of the National Insurance increase.
Firstly, if you’re not already using software like Clear Books payroll, you will find it much easier, faster, and more accurate to use software to run your payroll, as well as keeping on top of the changes in the rates.
To help prepare for the financial impact, it’s worth taking the time now to work out what the additional costs will look like for your business so you can perhaps make savings elsewhere.
It’s also a good idea to keep your employees in the loop so they too know what to expect and how you’re planning to help them through this uncertain period. And of course, you might find it helpful to ensure you’re using accounting and payroll software that takes the guesswork out of tax deductions.
Clear Books: Accounting & Payroll Software for Small Businesses
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