National Insurance Hike: What employers need to know

When Prime Minister Boris Johnson announced a UK-wide 1.25% health and social care levy to be added on to both employer and employee National Insurance contributions in April 2022, he caused quite a stir.

Johnson confirmed a £12bn annual tax rise to fund health and social care spending, adding that the increase would share the cost “as fairly as possible” between individuals and businesses after saying that the government was “taking the tough decisions that the country wants to see”.

What is National Insurance?

It’s a tax on earnings paid by both employees and employers with the self-employed paying it on profits of £6,515 or more a year.

Introduced by the National Insurance Act 1911 and expanded by the Labour government in 1948, it acts as a form of social security, since payment establishes entitlement to certain state benefits for workers and their families.

It is automatically deducted from workers’ pay packets via the pay as you earn (PAYE) tax code and goes straight to HM Revenues and Customs (HMRC).

What impact will the hike have?

The PM claimed that the highest earning 14% of the population would pay around half of the revenue raised and that most small businesses would be protected. Indeed, 40 per cent are expected to pay nothing extra at all.

According to People Management, a snap poll by the CIPD found that 74 per cent of respondents said there would be an increase in their organisations’ costs following the health and social care levy. Only 2 per cent said there would be no increase. 

Several have warned that the increase will hamper the economic recovery while others suggested that it would de-incentivise bosses from hiring new members of staff.

Reacting to the proposed increases, Suren Thiru, Head of Economics at the British Chambers of Commerce, said: “Businesses strongly oppose a rise in National Insurance contributions as it will be a drag anchor on jobs growth at an absolutely crucial time. Firms have been hammered by 18 months of covid related restrictions and have built up huge debt burdens.

“This rise will impact the wider economic recovery by landing significant costs on firms when they are already facing a raft of new costs pressures and dampen the entrepreneurial spirit needed to drive the recovery.”

There are currently shortages of staff in several sectors, so will this hike further hurt businesses’ plans to add much needed team members?

Johnson did reveal in a press conference following the address that he did not think the tax would have an impact and the recovery, although some businesses have expressed a concern about how the increase in contributions might have an adverse effect.

The news of a rise in tax is not good timing with the furlough scheme due to come to an end on September 30, meaning that the recovery is unlikely to get any easier unless further support is introduced.

While employers will be hit, employees will no doubt be counting the cost too, right?

Anyone in work aged 16 or over who earns more than £184 a week must pay National Insurance unless they are over retirement age.

Those who receive salaries under £9,564 won't have to pay the levy or National Insurance.

This is how much a 1.25% rise will hit your employees if they earn:

• £20,000 per year - £130 extra in tax a year
• £30,000 per year - £255 extra in tax a year
• £50,000 per year - £505 extra in tax a year
• £80,000 per year - £880 extra in tax a year
• £100,000 per year - £1,130 extra in tax a year

When will all this happen?

The rise will start in April 2022 for working people. From April 2023, the government says it will appear on payslips as a separate Health and Social Care Levy and apply to workers who are over pension age, which, as mentioned earlier, National Insurance contributions do not.

How can you be ready for the changes?

It’s important to be aware that low earners, young people at the bottom of the pay structure and those above pension age but still working would likely bear the brunt of the new levy.

To support them it is important to look at the effect the NI increase will have on their earnings and make sure that any real hardship cases are looked at and addressed.

On top of that, be mindful of the effect it will have on every member of staff’s wages going forward and whether that could have a big impact on them.

Make sure staff are aware of the pay rise in advance and use the calculator for working out your PAYE tax and National Insurance contributions.