What the National Insurance Increase Means for Businesses and Their Employees

Last month, the Prime Minister Boris Johnson announced an increase to national insurance rates to help raise an extra £12bn a year for health and social care. The announcement means that all rates of national insurance contributions (NIC) and income tax on dividends will increase by 1.25% from 6 April 2022.

The announcement has many businesses worried, with many struggling to bounce back from the pandemic after support such as the Job Retention Scheme having now expired. 

With that in mind, let’s take a look at how these changes will affect businesses with employees as well as the employees themselves. But first, it’s worth detailing the changes themselves before discussing their knock-on effects. 

How Are National Insurance Contribution Rates Changing in 2022?

As mentioned, from 6 April 2022 NIC rates will increase across the board (including on income tax on dividends) by 1.25%. Then, from April 2023, NIC rates will revert to their current rates and the increased rates will be rebranded as a health and social care levy. It’s worth noting that the levy introduced in 2023 will also include individuals who are over the state pension age.

The below summary shows the increase in rates for next tax year:

Class 1 NIC (Employees and Employers)

Class 1 Employee2021/222022/23
0 – £9,5680%0%
£9,568 – £50,27012%13.25%
Above £50,2702%3.25%
Class 1 Employer  
0 – £8,8400%0%
Above £8,84013.80%15.05%

Class 4 NIC (Self-employed)

0 – £9,5680%0%
£9,568 – £50,2709%10.25%
Above £50,2702%3.25%

Dividend Tax

Basic rate band7.50%8%
Higher rate band32.50%33.75%
Additional rate bank38.10%39.35%

As you can see, the changes will affect almost all workers. Only the very lowest earners will be spared from the increases. 

But what are some of the potential knock-on effects from these changes that businesses will have to think about? 

How the National Insurance Contribution Hike Will Affect Businesses with Employees

In essence, the increase will drive up the cost of employing individuals. This is rightly concerning for many businesses still trying to emerge from the pandemic’s challenging trading conditions.

As a business owner, you will need to review the changes and adjust budgets to ensure they have plentiful cash flow for these increased costs. You might look at these changes and put off hiring an extra employee or evaluate the merits of splitting a role into two part-time positions that earn below the NIC threshold.

How the National Insurance Contribution Changes Will Affect Employees

Of course, the main disadvantage of the changes is that your employees will have less take-home pay due to the hike in NIC rates. Below is a summary of how the changes will impact employees at various salary levels:

IncomeCurrent National Insurance paymentsNational Insurance payments after rise

As you can see, many of your employees could end up hundreds of pounds worse off after the changes. Your highest earners could potentially lose more than £1,000 of their earnings at the previous NIC rates. 

Action Steps for Businesses Before April 2022

With these changes due to come in just six months’ time, businesses will need to take action to ensure that they don’t end up worse off. The below list is by no means exhaustive, and it’s worth speaking to experienced accountants to review your options.

Estimate and Budget for Increased Costs 

With several months left to adjust, you must sit down now and work out what the hike means in terms of actual costs for your business. You can then create a plan and adjust budgets and cash flow forecasts accordingly. 

Communicate With Employees 

Employees will also have to pay more in terms of NICs, which will be reflected in their take-home pay. To prevent unnecessary surprises down the line, it’s vital that businesses communicate these changes to their employees now so they themselves can plan for taking home less pay each month. 

Checking and Double-Checking that Everyone is Paying Correct NICs

While costs will undoubtedly increase, you could end up overpaying your national insurance without due care and attention. Thus, make sure that an experienced accounting team checks over your figures to ensure they are correct. 

Concerned about the National Insurance Hike? Speak to Our Experienced Team Today 

Many of you are rightly concerned about the increases in National Insurance Contributions and what they mean for your company and your employees. 

During periods of change, the likelihood of making a costly mistake increases. Thus, it makes sense to enlist the services of an experienced accounting firm that has already enacted the necessary changes for many Hampshire firms. 

By having the alterations taken care of ahead of time by the professionals, you can have peace of mind that you won’t get stung with any further costs when the changes come in. 

To speak to a member of our team about the upcoming changes, simply give us a call on 023 92 269977 or email us at enquiries@jwraccountants.co.uk to discuss your options. 

National Insurance Price Hike

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