On September 7th, 2021, Boris Johnson revealed plans to increase National Insurance by 1.25 percentage points from April 2022.
The increase will affect employees, employers, and the self-employed across the UK and has been designed to fund health and social care following the Covid-19 pandemic.
National Insurance is automatically deducted from employees wages via the pay as you earn (PAYE) tax code and goes straight to HMRC.
Although the new social care reforms will only apply 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 applies to:
- Class 1: Paid by employees
- Class 4: Paid by the self-employed
- Secondary Class 1, 1A and 1B: Paid by employers
From April 2022:
- The current 12% rate on earnings between £9,564 and £50,268 will rise to 13.25%
- The current 2% rate on earnings over £50,268 will rise to 3.25%
- Employers will also have to pay more, contributing 15.05% in National Insurance on employees’ earnings over £170 per week, up from the current 13.8%
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 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 new staff expensive. Employers pay a percentage of Class 1 National Insurance for each employee, depending on how much they get paid. This could raise recruitment challenges or causes businesses to try to make savings elsewhere.
Another area the new rules will impact is employee benefits. As an employer, looking ahead, you will likely need to cut back on other spendings – such as defined contribution pensions – to fund the change.
If you’re a sole trader, the increased rate 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 that you pay your salary, a tax on earnings is 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 to pay an additional £180, and a typical higher rate taxpayer earning the median higher rate taxpayer’s 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.