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Increase in National Insurance contributions – what it means for your business

10/10/2021 minute read Voirrey Ellison

An increase in the amount of money that employers and employees must contribute towards National Insurance is coming into play in April 2022 – this contribution is also being referred to as the Health and Social Care Levy. Read on to find out more information on how this will affect your business.

In this article we will be covering:

  • What National Insurance is and why it was introduced
  • Who will and won’t be affected by increased contributions to National Insurance
  • How much contributions will be increasing by
  • Why this change has been made
  • How your business can remain compliant and ahead of this change

What is National Insurance?

The National Insurance Act was introduced in 1911 as a national system of insurance, designed to protect working people against loss of income relating to sickness or unemployment. 

Now, it is a tax that is used to pay for the NHS, benefits and the state pension.

People pay mandatory national insurance if they are over 16 and:

  • an employee earning above £184 a week
  • self-employed and making a profit of £6,515 or more a year

Paid workers stop contributing to National Insurance when they reach the state retirement age. As of April 2021, this is 66 for men and women.

How much is National insurance increasing by?

From 6 April 2022, National Insurance contributions will increase by 1.25%. This extra tax will be spent on the NHS and social care in the UK.

So what might this look like for you and what sort of difference will this make to your wage slip?

British workers are divided into different National Insurance ‘classes’ depending on how much you earn and your type of employment – this then determines the amount of National Insurance Tax you will pay. You can find out which class you are, by reading and understanding your pay slip.

According to the Government website, the classes can be broken down as follows:

National Insurance Class Who this applies to
Class 1 Employees earning more than £184 a week and under State Pension age – they’re automatically deducted by your employer
Class 1A or 1B Employers pay these directly on their employee’s expenses or benefits
Class 2 Self-employed people earning profits of £6,515 or more a year. If you’re earning less than this, you can choose to pay voluntary contributions to fill or avoid gaps in your National Insurance record
Class 3 Voluntary contributions – you can pay them to fill or avoid gaps in your National Insurance record
Class 4 Self-employed people earning profits of £9,569 or more a year

The bullet points below show the costs that an employee can expect to pay towards National Insurance from April 2022, in relation to what their salary is and what they are currently paying in National Insurance tax now.

  • £10,000 salary: £52 paid now; £57 with 1.25% increase – £5 extra each year
  • £20,000 salary: £1,252 paid now, £1,382 with 1.25% increase – £130 extra each year
  • £30,000 salary: £2,452 paid now; £2,707 with 1.25% increase – £255 extra each year
  • £40,000 salary: £3,652 paid now; £4,032 with 1.25% increase – £380 extra each year
  • £50,000 salary: £4,852 paid now; £5,357 with 1.25% increase – £505 extra each year

What percentage is National Insurance currently?

In 2021, current National Insurance contributions stand at a 12% taxation on earnings between £9,564 and £50,268. However, anything earned above this amount is charged at a rate of just 2%. 

National Insurance rates have remained at 12% since 2011, and as of April 2022, when the new rates come into play, this will be the biggest hike in National Insurance contributions for ‘upper band’ workers since 1975, when flat rates were phased out.

Why is National Insurance increasing?

The decision has been made to increase National Insurance contributions so that more money can be spent on the social care system. Unlike the NHS, the social care system is not free for everyone.

The Government says funds raised by these tax increases will be legally ring-fenced to help the NHS clear backlogs and resolve long-standing issues around care costs across the UK.

Useful information to note regarding the plans for social care funding:

  • As of October 2023, anyone in England who does not have assets over £20,000 will have social care costs fully covered by the state.
  • People that have between £20,000 and £100,000 in assets will need to contribute towards their costs but will also receive state support.
  • Anyone with more than £100,000 worth of assets, including property, will not receive state support.

The cost of social care will also be capped at £86,000 over a person’s lifetime.

Who will be affected by the increased contribution?

It is not just employees that will be affected by the changes in mandatory National Insurance contributions – employers will also be affected by this update.

What does this mean for employers?

Employers are responsible for deducting income tax and National Insurance from employee’s wages. They are also responsible for paying an employer National Insurance contribution, too.

The Government has announced that employers’ National Insurance contribution will also be increasing by 1.5% from April 2022. This means the rate for employers will stand at 15.3% on all earnings above the secondary threshold for most employees.

For employers, the increase is being introduced at a time when businesses are preparing themselves for a jump in corporation tax from 2023.

Employment taxes already account for a sizeable chunk of the taxes directly borne by businesses. Research by PwC shows that in 2020, employer National Insurance contributions accounted for 25.7% of all taxes borne – those that come at a direct cost – by the UK’s biggest listed firms. 

Employers must ensure that their payroll teams are aware of, and implement these changes correctly – using quality payroll software can help to ensure that employers handle these changes seamlessly.

What does this mean for employees?

For all those eligible to pay National Insurance contributions, these changes will mean that more money is deducted from your pay – how much more is deducted is dependent on how much you earn and your type of employment. 

As employees, there is nothing you have to do – these deductions are made on your behalf by a payroll or accounts team.

If you are self employed – you will have to take these changes into account and make larger contributions as part of your self assessment.

Who isn’t affected by this?

  • Persons who have reached state pension age of 66, will not be affected by this as they no longer are required to pay National Insurance
  • Those who do not work and are therefore not required to pay National Insurance contributions will not be affected by the changes
  • Equally, people that are below the age of 16 will not be affected by this change
  • Workers earning less than £184 a week
  • If you are self-employed and making less profit than £6,515 a year

How your business can stay compliant

Advanced’s payroll software seamlessly handles big changes like this – meaning your payroll team can adapt and react to changes to the best of their ability – without the hassle.

Find out more about Advanced Payroll and get in touch with us today to book your demo.