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Increase in National Insurance Contributions on the Way

National insurance contribution (NIC) are set to increase by 1.25% from 6 April 2022.  This is an across-the-board increase and affects employers, employees and the self-employed and partnership members. 

This article is intended for clients in each of the above categories and considers whether it is appropriate to accelerate income into 2021/22 to beat the increase.

Introduction

As part of a measure to raise an additional £12bn in funds for health, social care and to help cover the costs of the Covid-19 pandemic, Rishi Sunak announced in the Autumn Budget 2021 an across-the-board increase in the rates of national insurance contributions (NIC), with effect from 6 April 2022.

The increase was billed by the Chancellor as a “temporary” for 2022/23 only.  However, the temporary 1,25% increase is being replaced with a new Health and Social Care levy which will also be 1.25% so, for all intents and purposes, the increase is “permanent”, just with a different label.

The increase will affect all workers, whether employed or self-employed, as well as employers who will see payroll costs increase.

Directors and employees

Salary from directorships and employment income is subject to both employees and employers class 1 NIC.

The rates of employees and employers NIC for 2021/22, 2022/23 and 2023/24 are set out below:

Employees

Employees class 1 NICY/E 5 April 2022Y/E 5 April 2023From 6 April 2023
Earnings below primary threshold *0%0%0%
Earnings between primary threshold and upper earnings limit **12%13.25%12%
Above upper earnings limit2%3.25%2%
Health and social care levy
Earnings below primary threshold *N/AN/A0%
Earnings above primary thresholdN/AN/A1.25%

*   Primary NIC threshold is £184 per week for 2021/22 and £190 per week for 2022/23.  2020/24 thresholds not yet announced.

** Upper earnings limit is £967 per week for 2021/22 and 2022/23.

One important point to note is that, although employees above state pension age do not pay employees NIC, they will be liable to pay the health and social care levy when it comes into effect from 6 April 2023.

Employers

Employers class 1 NICY/E 5 April 2022Y/E 5 April 2023From 6 April 2023
Earnings below secondary threshold *0%0%0%
Earnings above secondary threshold13.8%15.05%13.8%
Health and social care levy
Earnings below secondary threshold *N/AN/A0%
Earnings above secondary thresholdN/AN/A1.25%

*   Secondary threshold is £170 per week for 2021/22 and £175 per week for 2022/23.  2020/24 thresholds not yet announced.

Note: The temporary NIC increase and the Health & Social Care Levy also apply to both class 1A NIC (on benefits in kind) and class 1B NIC (on PAYE settlement agreements).

Self-employed, partners and LLP members

Trading profits and profits from partnerships and LLPs are subject to both class 2 and class 4 NIC. 

Class 2 NICs are a flat-rate contribution and are not subject to the 1.25% increase.

Class 4 NICs are profit-related contribution chargeable at the following rates:

Class 4 NICY/E 5 April 2022Y/E 5 April 2023From 6 April 2023
Profits up to lower profits limit *0%0%0%
Profits between lower profits limit and upper profits
limit **
9%10.25%9%
Profits above the upper profits limit2%3.25%2%
Health and social care levy
Profits up to lower profits limit *N/AN/A0%
Profits above the lower profits limitN/AN/A1.25%

*The lower profits limit is £9,568 per annum for 2021/22 and £9,880 per annum for 2022/23. 2020/24 thresholds not yet announced.

** Upper profits limit is £50,270 for 2021/22 and the same for 2022/23.  2020/24 thresholds not yet announced.

Accelerating Income into 2021/22

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You may wish to consider legally accelerating income, e.g. paying a bonus sooner, by paying it before 6 April 2022 to beat the increase.

For example, paying a bonus of £10,000 to an employee/director on 5 April 2022 rather than 30 April 2022, would save £125 in employees NIC and £125 in employers NIC.

Before accelerating income, you should be aware of the potential danger zones.

Danger Zones!

Extreme care should be taken in the following situations

Situation 1

Take care not to take the additional income into a higher income tax bracket by accelerating it to 2021/22, i.e.

  • By bringing income forward to 2021/22 into the higher rate tax band which would otherwise be the basic rate tax band in 2022/23, On earned income which crosses into the higher rate band from the basic rate band by £10,000, this would result in extra tax on the income of £2,000 (£10,000 x (40% – 20%).
  • By bringing income forward to 2021/22 into the additional rate tax band which would otherwise be the higher rate tax band in 2022/23, On earned income which crosses into the additional rate band from the higher rate band by £10,000, this would result in additional tax on the income of £500 (£10,000 x (45% – 40%).

For 2021/22, the income tax rate bands are as follows:

BandTaxable incomeIncome tax rate
Basic rate£12,751 – £50,27220%
Higher rate£50,271 to £150,00040%
Additional rateAbove £150,00045%

Situation 2

If you claim child benefit and your total income is between £50,000 and £60,000.

Example:

Jennifer is an employee of Shanday Ltd and has impressed her employers over the past year. Her salary is £50,000. Her employers would like to pay her a bonus of £10,000 in April 2022 as a reward for her performance and they have suggested bringing the bonus forward slightly to the 2021/22 tax year to beat the increase in NIC, with a view to saving them £125 each.

Jennifer is single with two children and claims child benefit in respect of her children.  For 2021/22, the amount of child benefit that she receives is £1,827.80

HMRC recoup child benefit where the person has income above £50,000 in the tax year. 1% of the child benefit is recouped for every £100 of income between £50,000 and £60,000.  Once income goes above £60,000, the child benefit is recouped in full.

By accelerating the £10,000 bonus into 2021/22, Jennifer would save £125 in employees NIC. However, as the bonus would take Jennifer’s total income for 2021/22 to £60,000, the child benefit would need to be fully repaid to HMRC. By accelerating the bonus into the 2021/22 tax year, Jennifer would be £1,702.80 worse off.

Situation 3

If your income for the tax year is between £100,000 and £125,140.

Example:

Catherine is a director/shareholder in Anchor-S Ltd. Her only income for the year ended 5 April 2022 is a salary from employment of £90,000. 2021/22 has been a phenomenal year for Anchor-S Ltd. Her employers would like to pay her a bonus in April 2022 of £20,000 as a reward for her performance and they have suggested bringing the bonus forward slightly to 2021/22 to beat the increase in NIC with a view to saving them £125 each.

Catherine would be well advised not to agree to this. The reason is that where total income in a tax year exceeds £100,000, the personal income tax allowance (£12,570 for 2021/22) is abated by £1 for every £2 of income over £100,000. The effect of this is that the rate of tax on income in the range of £100,000 to £125,140 is effectively 1.5 times the normal tax rate.

The effect of this on the rate of tax on the bonus would be as follows

2021/22
Income tax bandNormal higher rate tax rateHigher rate tax on £100,000 – £15,140 bracket
Higher rate40%60%

So, in this example, the effective rates of tax on the bonus would be:

  • On the first £10,000 – 40%
  • On the balance – 60%

This would mean total income tax on the bonus is £10,000 (£10,000 x 40% + £10,000 x 60%.

In an attempt to avoid the extra NIC of £125 (and £125 for her employer), Catherine would pay an additional £2,000 in income tax if the bonus is accelerated into 202/22.

In this example, it would be sensible for the employer to pay £10,000 of the bonus before 6 April 2022 and the remaining £10,000 after 5 April 2022 in order to avoid the 60% tax charge in the £100,000 – £125,140 income bracket.

Conclusion

There is a small potential saving to be had from bringing income forward to the 2021/22 tax year.  However, care needs to be taken in the above situations to ensure that, in doing so, this does not actually leave you with MORE tax to pay.

CONTACT OUR PRIVATE CLIENT TEAM FOR MORE INFORMATION

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