National Insurance rise: What it means for employers and employees

Editor’s note: In the government’s mini-Budget on 23 September 2022, it was revealed that the rise in National Insurance is being cancelled on 6 November 2022. Learn more in our article: Mini-Budget 2022: What the announcements mean for your business.

Major changes to National Insurance came into force in April 2022, with a rise in contributions that impacts both employers and employees.

As a small business employer, what do you need to know and what should you be thinking about now to manage this increase in your outgoings and changes to your payroll?

We highlight the details in this article.

Here’s what we cover:

• What are National Insurance contributions for?
• What will National Insurance contributions rise to?
• Why is the National Insurance rise happening?
• How employers can manage the NICs changes
• Final thoughts on the rise in National Insurance

What are National Insurance contributions for?

National Insurance contributions (NICs) go into a fund that pays a number of state benefits, including pensions, statutory sick pay, maternity leave and entitlement to additional unemployment benefits.

It’s paid by employers, employees and those who are self-employed.

Those who earn small amounts or who are claiming benefits because they’re ill or unemployed or they’re acting as a carer can sometimes qualify for National Insurance credits.

These credits can help people to fill gaps in their National Insurance record, to make sure they qualify for certain benefits including the state pension.

For those who aren’t currently paying into National Insurance, they can choose to make voluntary contributions, which are known as Class 3 contributions.

What will National Insurance contributions rise to?

From April 2022, employees, employers and those who are self-employed are seeing the amount they contribute in National Insurance rise by 1.25 percentage points.

This means employees have to pay more National Insurance on their salaries, employers pay extra National Insurance contributions for their staff, and the self-employed pay more National Insurance on their profits.

Employer rises

Previously, employers paid 13.8% but this has risen to 15.05% in April 2022.

Employee rises

Employees pay what are known as Class 1 contributions. These start on earnings over £187 a week at a rate of 12% and then at 2% on all other earnings of more than £976 a week.

At the start of April 2022, these rates rose to 13.25% and 3.25% respectively.

Self-employed rises

For those who are self-employed, they’re paying slightly lower rates.

Previously, Class 2 contributions were paid on self-employed profits of £6,515 a year at a rate of £3.05 a week.

This is now £3.15 a week.

Meanwhile, Class 4 contributions are paid on taxable self-employed profits – it was 9% between £9,568 and £50,270, then 2% on anything above £50,270.

This has risen to 10.25% and 3.25% respectively.

Self-employed company director rises

Self-employed company directors have been affected by a 1.25% increase in tax on how they pay themselves on dividends.

The dividend tax rate for basic-rate income taxpayers has increased from 7.5% to 8.75%, and for higher-rate taxpayers from 32.5% to 33.75%.

Why is the National Insurance rise happening?

The increase in National Insurance has occurred due to the Health and Social Care Levy.

It’s a new, additional personal income tax, with the aim of paying for NHS and adult social care costs.

The levy came into play in April 2022, with the first year being funded by the increase in National Insurance – but this is only a temporary rise.

From April 2023, National Insurance will return to 2021/22 tax year levels. But that’s when the levy will come into its own.

From that point, it will become a separate deduction alongside National Insurance and income tax.

Although these new reforms will apply only to England, the changes in tax arrangements will affect the whole of the UK.

The money raised by the levy will be distributed across the four nations, with Scotland receiving £1.1bn, Wales receiving £700m and the figure for Northern Ireland being £400m by 2024-25.

How employers can manage the NICs changes

Employers should ensure that their payroll systems are ready to handle the increase in NICs in April 2022 and the new Health and Social Care Levy in April 2023.

Cloud payroll software can help to reduce costs and increase efficiency by reducing the amount of human input that will be required to devote to these changes.

It’s a good idea to check with your payroll software vendor you’re your solution is ready to apply the changes.

There are even some businesses supporting their employees with the hike in National Insurance contributions by offering pay rises.

It could be something that you consider for your company, to absorb the NIC increase or compensate them for it.

Final thoughts on the rise in National Insurance

Businesses are facing many headwinds at the moment.

That’s why ensuring that your payroll is up to date and that you’ve spoken to your staff, your accountant and even your bank or investors about these changes is essential.

That will mean that employers can concentrate on preparing their businesses to handle other challenges and to make the most of new opportunities in 2022 and beyond.

Editor’s note: This article was first published in March 2022 and has been updated for relevance.