New National Insurance rules explained

New National Insurance rules explained

Plans to increase National Insurance to help pay for social care hit the headlines this week. But what does it mean for businesses?

In short, it means that the majority or people will pay more National Insurance Contributions (NICs), which may hit smallest businesses the hardest.

As well as increasing administrative work, owners of limited companies face having to find the extra cash to fund NICs increases. 

While National Insurance will rise by 1.25% in April 2022, it will revert to current levels in 2023. But the 1.25% increase will then be collected via a new Health and Social Care Levy. 

As a result, there will be two payments to make from 2023: NICs and the new levy. Despite having two names, it is effectively being seen as an overall increase in National Insurance.

Here’s what it will mean to you and your business.

Current National Insurance rates

Employers, employees and the self-employed pay National Insurance Contributions (NICs), based on the earnings of employees. In the case of the self-employed the amount is calculated on profits.

  • Employees and employers pay Class 1 NICs and the rate is 13.8% for employers while employees pay 12% of earnings from £9,568 to £50,000. If earnings exceed that, the additional NICs are 2%. Employers currently pay Class 1 NICs of 13.8% on salaries over £8,840.
  • Self-employed people currently pay Class 2 NICs of £3.05 per week if their profits are over £6,515. Once profits exceed £9,568 they also pay Class 4 NICs at 9% of profits. If profits exceed £50,270, there is an additional 2% levy.  

New National Insurance rules 

Under the new rules, the amount of NICs will increase from 2022. 

  • Employers will be paying a new basic rate of 15.05%.
  • Employees will pay 13.25% on salaries between £9,568 and £50,000. Earnings beyond that will attract an additional levy of 3.25%.
  • The self-employed who pay Class 4 NICs will see their main rate rise to 10.25% of profits between £9,568 to £50,270. At that point, the higher rate will increase to 3.25%. Effectively, sole traders will lose an extra 1.25p for every £1 earned.

Example: For an employee or a self-employed person earning £20,000 per year employers would pay approximately £130 extra per year per employee. Employees and the self- employed would also pay £130 more per year.  

The Health and Social Care Levy

From April 2023, the National Insurance Contributions rates will return to their current amounts. But the extra 1.25% will instead be collected by HMRC in the form of a Health and Social Care Levy. The government says whatever is collected under this levy will be ring fenced for health and social care provision.  In effect, this makes no difference to the total percentage you will pay overall. 

Directors and dividends

Dividends paid by shareholders and directors of limited companies will also increase. Around 700,000 self-employed people and contractors set themselves up as limited companies.

This means being paid a salary up to the NI threshold and then dividend payments are made from profits. The basic dividend tax rate will rise from 7.5% to 8.75%, while those in the higher rate will see an increase from 32.5% to 33.75%.

What should I do?

For most employers, employees and the self-employed there is little you can do. Many commentators worry, however, that employers will need to reconsider recruiting new staff due to the added costs of NICs and the levy.

If you are a director of a limited company or are self-employed, it’s worth talking to an accountant to assess your situation. 

You can contact the team at Guidon Group if you are uncertain about the new Health and Social Care Levy and National Insurance Contribution rules.