The National Insurance Contributions (NICs) increased by 1.25 percentage points starting in April of 2022. After one year, starting in April of 2023, NICs will reduce once more and a new Health and Social Care levy will be introduced to collect the 1.25% instead. After a difficult 18 months of lost wages, staff shortages, and other massive challenges, many small business owners are still confused by how this rise is affecting them and their staff. But how does the national insurance and dividend rise impact your small business?
This rise will affect employers and employees differently
If you’re an employee, you’ll historically have been charged 12% each year towards National Insurance on any earnings above the Primary Threshold (£9,568 for the 21/22 tax year). Earnings over the Upper Earning Limit (£50,270 in 21/22 tax year) would have been charged 2% towards National Insurance.
Starting in April of 2022, these charges increased to 13.25% and 3.25% respectively. But, because your NIC as an employee is dependent on your salary, this means different things for different people.
The plan was to have the Primary Threshold at £9,800 for the 22/23 tax year with the Upper Earnings Limit at 50,284. This would have seen employees earning less than £45,000 paying up to 10% increase of their NIC. Those earning the UK median of higher rate wages of £67,000 would have had an 13% increase, while those earning £100k or above will see a 19%+ increase.
However, to confuse things further, in the Spring Statement the primary threshold was raised from 6 July to match the PAYE personal allowance of £12,570. This means over th 22/23 tax year as a whole, employees earning less than £34,000 were paying less national insurance in 22/23 than 21/22. Those earning the UK median of higher rate wages of £67,000 would have an 8% increase, while those earning £100k or above will see a 14%+ increase.
In other words, those who are getting paid more will be taxed more and subsequently covering the lion’s share of the billions this NI increase is expected to raise.
Employers, on the other hand, paid a flat rate of 13.8% National Insurance on any employees who earned over £8,840 per year in 21/22 tax year. This increased to 15.05% on salaries over £9,100 per year in the 22/23 tax year. This is an 8% increase of their NIC.
Employment Allowance means an estimated 40% of businesses will not be affected
Just like with individual employees, HMRC is predicting that only a small percent of UK businesses will be covering most of the earnings from this national insurance rise. In fact, about 70% of the new revenue will come from the 1% of businesses who have over 250 employees.
40% of businesses in the UK are expected not to be affected by this rise due to Employment Allowance. Employment Allowance is designed to support small businesses and encourage them to hire employees by covering the first £5,000 of their national insurance liability (was £4,000 in 2021/22). In order to qualify, you’ll need to have at least one non-director employee making over £9,100 per annum.
You can learn more about Employment Allowance, find out if you’re eligible, and make a claim here.
A low salary and dividend split is still the most tax efficient approach for limited company directors
This tax increase is not just on national insurance but on dividends as well, meaning if you’re a limited company director paying yourself in dividends you can also expect a 1.25% tax increase. How much tax you pay on dividends is dependent on your Income Tax band:
|Tax Band||Current Tax Rate||Tax rate beginning April 2022||% increase|
After having a look at all the different approaches, a low salary and dividend split is still the most tax efficient approach to take as a limited company director despite these new increases. If you’re eligible for Employment Allowance, we recommend paying yourself a salary of £11,908 per annum plus dividends. In the event you’re not eligible for Employment Allowance, then a salary of £9,100 plus dividends is most tax efficient.
If you’re self-employed, the impact you’ll experience depends on your profits
There are two different types of self employed NIC in the UK: Class 2 and Class 4. Both are assessed as part of your self assessment..
You pay Class 2 if you have profits over £6,725 in the tax year. In this class, you’ll pay £3.15 a week of National Insurance. In the 21/22 tax year, it was £3.05 a week and applied when you had profits over £6,515. So for most self employed, there is an increase of £5.20 of Class 2.
You also pay Class 4 national insurance if you make over £11,909 in the 22/23 tax year. In the 21/22 tax year, Class 4 was paid at 9% NIC on profits over £9,568, and an additional 2% NIC for profits over £50,270.
With the 1.25% increase in April of 2022, the rates will rise to 10.25% over £11,908 and 3.25% over 50,270. This means those with self employed profits under £29,000 will be equal or better off in relation to Class 4 contributions. Those with earnings above this will see % increases depending on their level of profits.
However much you’ll be impacted, there are ways you can prepare
2022 is proving difficult for a lot of businesses, self employed and employees. Inflation, energy price increases and concerns about recessions are coming on top of many organisations’ finances having been negatively impacted by Covid. At this point, we could all use some stability and confidence when it comes to our finances.
Especially for small business owners, we recommend speaking to an accountant to know exactly how you are being impacted by the above changes. If you have a more complex tax situation, like with additional income, student loans, child benefit charges or pensions, then it’s also best to speak to an accountant for further guidance.
At Fearless Financials, we work with small businesses who want to make a difference in our community and find financial security for themselves and their team. If you’d like to become fearless in the face of changes and uncertainty, get in touch with us today. You can also see all our videos on how the national insurance rise may impact you on our Instagram.