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The much-heralded increase in National Insurance comes into play today. Employees, businesses and the self-employed will pay an extra 1.25p in the pound as the base rate for National Insurance rises from 12% to 13.25%.
In real terms, this will mean an employee earning, for example. £27,000 a year example, will see their annual National Insurance contributions rise from £2,053 to £2,268.40.
Businesses paying Class 1, Class 1A or Class 1B National Insurance contributions will also need to start paying the extra 1.25% on contributions from today. Smallbusiness.co.uk estimates that the hike will see the NIC bill of the average employer increase by roughly 10% as a result of the changes.
'Health and Social Care Levy'
The National Insurance rise has been branded the ‘Health and Social Care Levy’ by the Government, who say it’ll raise a much-needed £39 billion to pay for the UK’s ballooning social care needs. HMRC is asking employers, where appropriate, to include the following message on payslips: 1.25% uplift in NICs, funds NHS, health and social care, in an attempt to remind workers of the necessity of this tax hike. However, the move has been criticised, with businesses arguing that it’s not their role to defend government policy.
The levy is being introduced in two stages; today’s increase, then from 6 April 2023, National Insurance rates go down to 2021-22 levels, and the levy will become a separate tax of 1.25%. One key difference from the old NI levy is that employees over pension age will have to pay the new levy, smallbusiness.co.uk reports.
The controversial NI hike comes a time when British workers face the highest tax burden in decades, while also simultaneously experiencing the biggest squeeze on their wages in 30 years. Prior to Rishi Sunak’s Spring Statement on 23rd March, trade unions and business bodies including the Birmingham Chamber of Commerce called on the Chancellor to drop the proposed NI hike. According to a poll by recruiter Randstad UK, nine out of ten employers wanted to see the 1.25% hike in National Insurance dropped.
Rishi Sunak elected to keep the National Insurance hike, but instead decided to raise the threshold for contributions from £9,980 to £12,570. This will come into force from July, and according to the Chancellor, amounts to a tax cut of £330 a year. The worker on £27,000 will see their National Insurance contributions change from £2,053 previously to £2,68.40 today – only for them to drop to £1,917 again in July. However, for the next three months, they will be paying the higher rate of National Insurance.
The same also applies to businesses, who will have to adjust their National Insurance contributions accordingly.
However, the change in National Insurance threshold means that only those earning £32,000 a year or less will be better off. As tax thresholds have been frozen this year, those receiving a pay rise may find themselves thrust into a higher tax bracket, meaning they’ll be paying more tax, not less. With inflation soaring to over 7%, prices of everything from food to fuel are increasing, and the Treasury is expected to rake in a whopping £38.6 billion in VAT over the next few years. According to the Daily Mail, households will pay an extra £430 in VAT next year as compared to last year – easily absorbing the money saved by raising the National Insurance threshold.
Analysis seen by the Daily Mail shows the hospitality sector (which is also now facing the removal of the lower rate of VAT) is facing a £360million tax hit as a result of the NI hike. The Daily Mail also reports that pub, restaurant and hotel owners are set to pay more than £215million this year to due to the hike, while hospitality workers will face an extra tax bill of nearly £145million.
The British Chamber of Commerce has urged Mr Sunak to scrap the NI rise as soon as possible, the Daily Mail reports. The organisation's director general, Shevaun Haviland, said: “'Last summer businesses were already saying there was an increase in raw materials prices and shipping costs, and recruitment was very hard. Into December, energy prices started to tick up - and that was before the war in Ukraine pushed them off the scale.
'And now they've got the NI hike. This is not business as usual - it's very serious. We just wanted the hike to be delayed for a year until businesses could get back on their feet.”
How this will affect HR
All of this is likely to amount to a headache for HR departments. To offset the squeeze on the pay packets caused by soaring inflation coupled with the NI hike, employees are likely to ask for pay rises – but facing soaring costs themselves, also including the NI hike, many businesses, especially smaller businesses, are unlikely to be able to afford pay rise of 7% of thereabouts.
Some employees will also, understandably, be upset about receiving a smaller pay packet. HR departments can make their staff aware that this was a government decision, not a business decision, and remind them of the change to the NI threshold coming into play in July, which will see the tax deductions for lower paid staff decrease once more.
Organisations facing soaring costs themselves may wish to consider hiring employees on a self-employed basis to avoid contributing towards higher NI payments. However, it is vital that employees are working under the correct employment status, as doing otherwise could lead to a breach of employment law, resulting in possible tribunals and hefty fines.
Another good option for employers to mitigate NI hike related issues is to look at encouraging employees to take up salary sacrifice schemes – or implementing these, if not already in place in your organisation. This will mean a lower tax burden for employees, and as smallbusiness.co.uk says, “can pay dividends as retention and recruitment tools.”
