The Government’s recent decision to increase national insurance contributions (known as NIC) by 1.25 per cent from April 2022 has come at a difficult time for SMEs, many of which are struggling with the effects and operational issues resulting from the pandemic. However, employers can help mitigate costs as they move along the road to recover by adopting a smart approach to spending and considering employee remuneration packages.
What changes have been made?
Last week, the Prime Minister confirmed that from April 2022, there will be a temporary 1.25 per cent increase in class 1 (employee) and class 4 (self-employed) NICs paid by workers, as well as a 1.25 per cent increase in class 1 secondary NIC paid, which are paid by employers. This increases the current NIC rate from 12 per cent to 13.25 per cent for employed and to 10.25 for self-employed individuals earning above the class 1 primary threshold and the class 4 lower profits limit (currently £9,568 in 2021/22) respectively. Employers will also have to pay the additional 1.25 per cent for employees earning above the class 1 secondary threshold (£8,840 in 2021/22). The temporary increase in National Insurance will be replaced by a permanent Levy in 2023. Dividend tax rates are also increasing by the same amount to discourage switching to a dividend strategy.
These increases in NIC rates will collect £12bn a year, which the Government plans to use to pay for the impact of the pandemic on the NHS and to invest in social care reform. However, the increases will add to the cost burden that SMEs are facing at a very challenging time. Many businesses have dwindling cash reserves due to lost income as a result of the pandemic. In addition to having to close their doors during national lockdowns and scaling back operations due to limited staff numbers, many employers have taken out Government-backed loans, which are now repayable. There are also additional pandemic-related costs that business owners need to consider, such as: funds used to create Covid safe working environments and providing the necessary equipment needed for those who had to work remotely. Pandemic related costs are not the only factor that have meant businesses have struggled over the past year, some have struggled to secure workers with the appropriate skill set because of Brexit, resulting in additional administrative and financial burdens when recruiting staff from overseas.
The proposed increase in NICs also has the potential to exacerbate skills shortages by reducing funds available for training. This may also encourage more individuals to work off-payroll, rather than being employees.
Employers must plan carefully to limit the impact of the upcoming NIC increase on their financial position. To prepare for the introduction of the new levy next April, some businesses may need to consider cancelling pay rises or scaling back plans to hire new staff. Some employers may be forced to only offer part-time positions or make pay cuts if they are unable to absorb the increased tax liability, so that they can ensure the wages are below the threshold for NICs.
It’s also important for SMEs to reconsider their remuneration packages and look for ways to minimise the effects of the proposed cost increases, for example, by making the most of exempt benefits. This should involve seeking expert advice sooner rather than later to find out how their current employee benefits could be affected.
Businesses can also get more for their money by taking full advantage of tax breaks. For example, the office Christmas party may be costing £350 a head once employment taxes have been considered. By keeping their spend per employee below £150, inclusive of VAT, and meeting the conditions, this event should be exempt from tax. Rather than blowing their entire budget in one go, the £200 per head cost savings could be invested in further events to help motivate the workforce throughout the remainder of the year or boost the business results.
Although the Government’s announcement has not come at the best of times for many SMEs in the UK, there are some simple steps employers can take to mitigate the impact of the proposed NIC changes on their cash position. Planning and taking the time to carefully review employee remuneration packages, means businesses can start to get back on track towards their plans for growth while maintaining a healthy financial position.