In September 2021, the Government announced a 1.25% increase in National Insurance contributions. This National Insurance rise was slated for April 2022, being implemented alongside the Health and Social Care Levy. This will affect businesses during the 2022-23 tax year.
Due to this levy, employers will be required to make larger National Insurance contributions on behalf of their employees. Your employees will also be expected to make a larger contribution from their own wages. Needless to say, this will have a notable effect on both you and your employees, and possibly mark the coming of future financial changes. As such, it’s crucial to know what this National Insurance rise is, and how it might affect your business, if it hasn’t already.
What is the National Insurance rise?
The National Insurance rise came as a result of the Covid-19 pandemic, which put considerable pressure on the NHS. Due to the strain, the Government drafted the Health and Social Care Levy, as a means to relieve the pressure and get the NHS working more smoothly. This levy will be in effect as of the 2022-23 tax year, denoting a 1.25% rise in National Insurance contributions. During this tax year, it will be paid as National Insurance. In the following tax year, it will appear as a new tax. Once the levy becomes a standalone tax, the National Insurance rate will drop to the 2021-22 rate.
The Government states that the tax is necessary to cover the costs of the NHS and social care. This National Insurance rise, and later tax, will generate income that will be spread across the United Kingdom. £1.1 billion will be spent on Scotland’s health service, £700 million on Wales’, and £400 million on Northern Ireland’s. The remainder of the generated income will be spent on England’s health service. The Government aims to have this completed by 2025.
For employers, payroll must clearly note the changes to National Insurance contributions. Employees need only expect to see their salary change to accommodate the larger contribution.
Future changes to the National Insurance threshold
Following the National Insurance rise, the Government will be raising the threshold to pay National Insurance. This will arrive in July, and may mean that you pay less in National Insurance contributions, not more.
In July, the National Insurance threshold will rise to £12,570. This is a noteworthy increase compared to the current earnings threshold of £9,880. While this may be beneficial to many workers, it will mean that employers must again amend their payroll systems to reflect the changes in July.
Who is affected by the National Insurance rise?
Though the National Insurance rise affects most, not everyone will be expected to make a larger contribution. There are several brackets of National Insurance, with each being affected differently. Your age and employment status will also affect how the new levy is applied to you. Below are the finer details.
If you are self-employed, your Class 2 contributions will remain untouched. For both the National Insurance rise and the following levy. However, if you earn more than the Lower Profits Limit for Class 4 contributions, your profits will be subject to the 1.25% National Insurance rise in 2022-23, and the levy in 2023-24.
If you are above the State Pension age, with profits above the Lower Profits Limit, you will only have to pay the 1.25% levy. If you reach the State Pension age during the 2022-23 tax year, you will be expected to pay both the National Insurance rise and the levy.
As you are self-employed, you will pay the levy using Self Assessment, as it is the same as any other tax.
If you are an employee, you will be expected to pay both the 1.25% National Insurance rise for the 2022-23 tax year, and the 1.25% Health and Social Care levy from 2023-24 and onwards. This will be applied to your Class 1 National Insurance contributions.
As an employee, your employer will deduct the National Insurance rise from your salary. HMRC has asked employers to clearly denote that this deduction is for the Health and Social Care levy, and so it should be apparent on your payslip.
Those above the State Pension age
If you are above the state pension age before the 2022-23 tax year, you will not be subject to the National Insurance rise. However, unless your earnings are below the primary threshold, you will be expected to pay the standalone 1.25% levy from the 2023-34 tax year.
If you are below the State Pension age, or reach it during the 2023-24 tax year, you will be subject to both the National Insurance rise and the levy. Provided you earn more than the Lower Profits Limit.
As an employer, you’ll have to ensure your systems are updated to process the additional NI rises. This will add both an administrative and a financial burden on employers as a result.
While the administrative burden was primarily during the changeover, the financial burden of paying more National Insurance will continue. For many employers there may even be the additional financial impact of employees asking for more money to compensate for their loss in take home.
While many large employers may be able to absorb the cashflow impact of the NI rises. Many fledgling or small businesses, or those with tight cashflow will struggle.
For the directors of these businesses, it will be important to keep an eye on the bottom line. To make sure that a business that was just above the waterline hasn’t now sunk below it as a result.
What can you do if the changes are too much?
There are many companies in the U.K that operate on a tight cash flow. Where even minor changes can have disastrous effects. If your company is struggling financially as a result of these changes, you might need to change your course.
For solvent companies hit hard by these changes, it may be best to close using a Members’ Voluntary Liquidation (MVL). This will allow you to close your company efficiently. Extracting as much of your retained profits as possible, while also paying the least tax. By appointing a licensed insolvency practitioner, much of the work and stress will be taken off your shoulders. You can be assured your company closes in accordance with the law.
If your company is insolvent, however, yet you would like to close, a Creditors’ Voluntary Liquidation (CVL) is likely to be the best option. Closing through a CVL will grant you access to professional advice and assistance, along with protection from your company being placed into a compulsory liquidation.
If you’d rather avoid closing your company, but have suffered a heavy financial blow as a result of the National Insurance rise, you should consider reaching out to business rescue experts. Every company’s situation is different, so there isn’t any one way business rescue plays out. That said, the faster you decide upon this course of action and reach out, the more options you leave open.
Clarke Bell can help
As a result of the National Insurance rise, some businesses may decide that now is a good time to wind down operations. If you are considering closing your company, don’t hesitate to contact our specialists at Clarke Bell. We have 28 years of experience helping companies close in the most advantageous way possible. We can do the very same for you. To find out how we can help, contact our team today.