National insurance increases: what they mean for your small business

On January 10th 2022, Prime Minister Boris Johnson revealed plans to hike up the national insurance contributions for employers and employees. He announced that the national insurance we pay each month will be increasing by 1.25 percentage points in an effort to raise £36 billion for social care. But how will the NI increase affect businesses? And what does the NI increase mean?

What does the national insurance increase mean?

The national insurance contributions increase will mean that NI contributions go from 12% to 13.25% on earnings under £50,268 and from 2% to 3.25% on earnings exceeding that amount. National insurance is automatically deducted from your salary before you get paid, alongside income tax, and is used to fund healthcare, sick, maternity and bereavement pay as well as the state pension.

The rise in national insurance will take place from 6th April 2022 and will remain until 5th April 2023. From April 2023, the national insurance contributions will decrease back to 12%, and the increase will be replaced with a Health and Social Care Levy equal to the same amount. This will be payable by everyone, including those over the State Pension Age.

The national insurance increase will affect everyone, employees, employers and, perhaps most of all, small businesses. For employers, their take-home wages will change. Those earning 10k a year will pay £5 more, those on 20k a year will pay £130 more, those earning 30k will pay £225 more each year.

There are exceptions to the national insurance increase. Apprentices under 25, employees under 21, armed forces veterans and employees in freeports are all exempt from the 1.25% rise.

How will the national insurance rise affect small businesses?

Sole traders and those who are classed as self employed will be hit the hardest by the national insurance hike.

First and foremost, the hike in national insurance also changes employer national insurance contributions. Employers will, from April 2022, have to pay just over 15% in national insurance contributions. According to Auditox Accountancy, this equates to paying £241.87 more tax a year for each member of staff employed by small businesses.

For people who are self-employed and thus pay Class 2 or Class 4 national insurance as opposed to Class 1 paid by most businesses and SMEs (small and medium enterprises), the national insurance increase will cause you to lose 1.25 pence for every £1 earned. Those who are in Class 2 will see an increase in national insurance from £3.05 to £3.15, whereas those in Class 4 will be subject to the full 1.25% increase.

But of course, this isn’t all. Small businesses and the self-employed are already struggling to stay afloat after the COVID-19 pandemic and various lockdowns, so this tax increase could break the banks for many. Paying more out for staff in order to ensure that employees are paid a living wage will result in businesses having to cut money from elsewhere, like training, benefits and profit.

What can small businesses do?

Whilst there is not much that small businesses can do before April 2022 to stop the national insurance hike, small business owners can put measures into place to make it easier to cover the national insurance costs.

The first step in preparing for the tax rise is to estimate how much it is going to cost your small business. Estimate what your annual profit is now, and how much that will reduce once the hike takes place. From there you can see how much change needs to occur in order to reduce costs where necessary and continue to pay your employees and national insurance contributions.

Business owners may also want to alert their staff members of the upcoming changes. This will allow them to prepare for the direct reduction to their income and will aid in reducing stress levels. Workplace communication is always essential in situations like this.

Aside from budgeting and planning, small businesses may opt to register for the Employment Allowance. Small businesses with a national insurance liability of less than £100,000 are eligible and can register for the allowance. If successful, the allowance will reduce the liability for the current tax year by £4,000 (or £5,000 in 2023).

Employees may also choose to opt for a salary sacrifice scheme. This involves employees agreeing to reduce their salary by the amount they would usually lose as a pension contribution, and the employer agrees to increase their pension contributions by the same amount. This means the employee pays less national insurance because their gross pay is lower, and the employer does not have to pay national insurance contributions on the pension. This is not always possible, however, especially for employees on minimum or living wage.

Are any measures being put in place to lessen the impact of the national increase hike?

Chancellor Rishi Sunak has announced that as of July, workers will be able to keep more of their income before national insurance is automatically deducted.

As of July, there will be an increase in the National Insurance Threshold. This means that employees will be able to keep more of their money prior to paying their taxes. The changes mean that employees will not pay national insurance contributions unless they earn over £12,570. At the moment this figure is set at £9,568.

For self-employed people, this means that on profits between £6,725 (the max you can earn before paying taxes) and £9,880 you will pay 0% tax. On earnings over 9k but under 50k, you will pay 10.25% + £3.15 per week.

The changes in national insurance are being made for a good cause, and the NHS and health and social care sector definitely need the money being raised. However, that does not necessarily mean that it should come at the expense of entrepreneurs, small business owners and self employed individuals. Many people applied pressure to both prime minister Boris Johnson and Rishi Sunak to get the idea for the hike scrapped, but to no avail.