There has been a lot of coverage of the impact of the National Insurance increase for employees and whether this will actually help social care. However, many employers are now planning their budgets for next year and considering pay rates you should consider how it will affect your organisation.
Our founder Rachel Eden explains the impact for charities and small business
What is changing?
There are various tax rises covered under the banners of the ‘National Insurance rise’. For simplicity I just consider the impact from April 2022 to March 2023 – the following year has similar impacts but the tax will be dubbed a ‘levy’ and been shown seperately on tax bills.
Key changes for individuals are:
- An uplift equivalent to 1.25% of income for employees earning over the primary threshold (currently £9,568 a year)
- An increase in national insurance for the self-employed of 1.25% earning above the primary threshold (currently £9,568 a year)
- A levy on dividends, meaning the tax on dividends for basic rate tax payers will rise from 7.5% to 8.75% – don’t forget that dividends are not deductible for corporation tax so you also need to consider the increased corporation tax rates already announced.
Organsiations also need to consider that there will be a tax increase for employers raising employers National Insurance from 13.8% to 15.05% for wages above the secondary threshold (currently £8,840 for each employee in 2021/22)
What does it mean for employers?
The impact of the increase for any organisation, whether a business or charity employing people is two fold:
Firstly, staff will receive lower take home pay even with the same headline “wages”. This may put pressure on employers to increase wages to compensate for this. For example, if you are a real living wage employer it’s not yet clear how the Living Wage Foundation will deal with this increased cost in their calculations but we would expect it to have an impact.
Secondly, the increased tax of 1.25% of the wage bill on employers, adds to the cost of employment.
What about the £4,000 allowance for small employers?
If you currently are eligible for the £4,000 rebate for small employers this will still apply.
However be aware that this increase in employers National Insurance could put you over the threshold, meaning you start effectively start paying employers National Insurance for the first time.
Are there any exceptions for charities or small businesses?
Other than the £4000 allowance for small employers no other special exceptions have been announced.
What about those on lower incomes?
Workers on very low weekly incomes don’t pay National insurance: at present (in 2021/22) this is employees who earn less than £184 a week. Employers don’t pay any national insurance on their employees who earn less than £170 a week.
The allowance for the first £2,000 of dividends to be received without tax is also currently unchanged.
Over these amounts, this tax increase will affect people who are either earning through wages, self employed or receiving dividends.
What about people over retirement age who are working?
Next financial year there’s no impact but from April 2023 the ‘levy’ will also those over retirement age.
What should we do?
As a small business or charity you should plan for this increase in cost and consider the impact on your employees.
You need to consider how you communicate with your employees and how this will impact on pay negotations. You should also look at your options financially. It’s worth linking this into your financial planning or budgeting more generally. Ultimately this money will come from some combination of saving on other costs, finding a way to increase your income or – if you run a business – accepting a lower margin.
Further reading
The ICAEW has published a detailed analysis here. You may also be interested in our blog post on managing payroll