The changes in National Insurance Contributions (NIC) that came into force in April 2022 impact directors and employees.

The increase in NIC affects employers and employees in different ways, but how does it affect you as a director? Also, what should you be thinking about to efficiently manage the increase in your outgoings and the changes in payroll?

What are National Insurance Contributions?

National Insurance Contributions go into a fund that pays for state benefits such as pensions, statutory sick pay, maternity leave, and other entitlements. Employers, employees, and self-employed workers must pay NIC.

People who earn small amounts, claim benefits because of illness or unemployment, or act as a carer often qualify for National Insurance credits. The credits can help fill gaps in their NI record and allow them to still qualify for certain benefits, such as a state pension.

How Much are National Insurance Contributions Rising?

The rises that have come into effect in April 2022 are:

The amount employers, employees, and self-employed workers have to contribute has risen by 1.25 percentage points. So, how does this look for each contributor?

Employers

Employers previously paid 13.8%. Their contributions have now risen to 15.05%.

Employees

Employees paying Class 1 Contributions (starting on earnings over £187 a week) previously paid 12% and 2% on all earnings over £976 a week. These rates have now risen to 13.25% and 3.25%, respectively.

Self-employed

Self-employed workers pay slightly lower rates. They previously paid Class 2 Contributions on profits of £6,515 a year at a rate of £3.05 a week. Now the rate is £3.15 a week.

Class 4 Contributions are paid on self-employed taxable profits was previous 9% between £9,568 and £50,270, then 2% on any earnings above $50,270.

These rates have risen to 10.25% and 3.25%, respectively.

Self-employed Company Directors

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

The dividend tax was previously 7.5% but has now increased to 8.75%, and for higher taxpayers, from 32.5% to 33.75%.

Who is a company director?

A director is defined (in reg. 1 of the Social Security (Contributions) Regulations 2001 (SI 2001/1004)) as:

• – A member of a board or similar body where the company is managed by a board or similar body;
• – A single person where the company is managed by an individual.

The definition is extended to include a person under whose instructions a director is accustomed to act but excludes anyone providing professional advice only when operating in a professional capacity (such as an accountant or a lawyer serving as such).

How Will the NIC Increase Affect Companies?

NIC increases not only impact individuals, they also affect employers in various aspects of running a business.

Employers

If you have staff members and work with payroll, the employer rate of NIC increases from 13.8% to 15.05% for all income per employee over £8,840 a year – resulting in an effective increase of over 9%.

Employer’s Allowance

The Employer’s Allowance usually covers the first £4,000 of some business National Insurance costs and remains available. The allowance has been extended to cover the new Health and Social Care Levy when it becomes a separate tax.

Fringe Benefits.

Class 1A rates that employers pay on many fringe benefits, such as company cars and private medical insurance, increase from 13.8% to 15.05%. If PAYE settlement agreements are in place, the Class 1B rates increase equally.

Directors Loans

If you have any overdrawn directors’ and shareholders’ loads which give rise to a Section 455 charge, the rate has increased from 32.5% to 33.75%.

How do NIC Increases Affect your Business Planning?

The NI bill for limited companies will increase by roughly 9% over previous levels. Unincorporated companies will see the largest impact in the changes in Class 4 National Insurance. Contributions will increase by 13.9% and to 3.25% on income over £50,270 – an effective rise of 62.5% that you’ll have to factor into all financial and budgeting planning.

Alternative Solutions

Using annual thresholds results in significant variances in the liability throughout the year. 

A director can avoid the variances by using alternative arrangements and elect for contributions to be calculated throughout the year on a non-cumulative basis by referencing the thresholds for the pay interval as for other employees.

You’ll need to perform a recalculation on an annual basis in the last month of the tax year to ensure you meet the statutory requirement for an annual earnings period. Any balance owing needs to be deducted from the director’s earnings for that period.

Summary

As tax rates increase, business owners will have to re-examine their remuneration policies, and we can expect to see greater pension contributions, loans from companies, and acceleration of remuneration new at cheaper tax rates with potential advances back to the company for cash flow reasons.

The best way to adjust your financial and budgeting plans is to talk to our experts at TS Partners. We can guide you through all the NIC changes and how they will affect your business.