Changes to National Insurance contributions

To understand the NIC changes contained in the Spring Statement for businesses and individuals, we should first look at what was previously announced.

An increase in NIC rates for employees and the self-employed of 1.25% was to take effect in 2022/23. This took the employee rate from 12% to 13.25% up to the upper earnings limit and from 2% to 3.25% thereafter; and the
self-employed rate from 9% to 10.25% up to the upper profits limit and from 2% to 3.25% thereafter.

There was also to be an increase in NIC rates for employers from 13.8% to 15.05%.

This was to be combined with the usual uprating in the point at which NICs start to be paid from annual earnings/profits of £9,568 to £9,880 for employees and the self-employed, and from £8,840 to £9,100 for employers.

The intention was for the increased rates to apply for one year only, after which the additional 1.25% would be ‘decoupled’ to create a new, mainly earnings-based tax (although it additionally applies to dividends, so that shareholder directors who pay themselves mostly in dividends cannot avoid it). This new tax was to be called the Health and Social Care Levy, with NIC rates returning to previous levels.

The Spring Statement announcements amounted to a partial reversal of the increased costs for employees and the self-employed (targeted at lower earners), in an attempt to address the ‘cost of living crisis’, but there was little to ease the pain for employers. It remains to be seen to what extent this will be absorbed by employers, passed onto employees through lower pay increases, or passed onto consumers through price increases.

The partial reversal was achieved not by adjusting NIC rates, but by further increasing the point at which NIC starts to be paid by employees and the self-employed. There was no corresponding increase for employers. An adjustment is made for directors and the self-employed, to the annual equivalent of £11,908, as their liability is calculated on an annual basis.

From 6 July 2022, the NIC starting point increases from £9,880 to £12,570, in line with the personal allowance, and it was announced that this alignment will be maintained, as the personal allowance is frozen until April 2026. However, this does mean that over time, particularly with high inflation, the benefit of this change will be eroded, and some lower earners who for now have been taken out of the obligation to pay NIC will find themselves back in it.

For 2022/23, the overall effect of the changes is that employees earning up to around £35,000 will pay less NIC than they did in 2021/22, and self-employed people earning up to around £29,000 will also pay less. Above these amounts, they will pay more.

The government estimates 70% of workers will be ‘winners’ from this, so who are the losers?

Firstly, and most obviously, higher earners, particularly those already above £50,270, who will see their marginal NIC rate go up from 2% to 3.25%, a 62.5% increase! Those earning substantially more than £50,270, will see very large increases in their NIC bills.

Secondly, employers. The only mitigating factor for them is a modest increase in the Employment Allowance from £4,000 to £5,000. Moreover, this is withdrawn when total employer NIC exceeds £100,000, which will over time affect more employers due to inflation and higher NIC rates.

Thirdly, older workers. When the NIC increase transforms into the Health and Social Care Levy in 2023/24, employed and self-employed people over state pension age, who do not currently pay NIC, will be required to pay it.

There are also a number of possible consequences, including:

• An increased incentive to salary sacrifice into additional pension contributions.
• As self-employed people earning between £6,725 and £11,908 (2022/23) they will pay Class 2 NIC at 0% and qualify for NI credits, whereas those earning less than £6,725, would have to pay voluntary contributions to achieve the same result, an incentive to earn at least that amount.
• Possible future amalgamation of income tax and NIC…
• which could lead to a (lower) fixed rate of pension tax relief for higher earners.

And finally…

Although not compulsory, HMRC is ‘encouraging’ employers to explain the NIC rise on payslips and has even suggested the wording for doing so. Employers have long complained about being unpaid tax collectors for the government. How might they feel about being asked to justify their taxes too?